Final answer:
The ultimate impact of unemployment benefit supplements on total spending is significant due to the multiplier effect, where the increased spending from these benefits circulates through the economy, leading to higher aggregate expenditures and stimulating demand.
Step-by-step explanation:
When considering the ultimate impact of unemployment benefit supplements on total spending, it's essential to understand the multiplier effect. In 2020, the unemployment insurance benefits and other fiscal policy measures like the stimulus checks provided critical support to the economy. These measures function as automatic stabilizers, boosting aggregate demand during economic downturns. Given that more than 20 million people were able to replace a portion of their salaries, this increased their purchasing power, leading to higher consumer spending.
Furthermore, every dollar spent as unemployment benefits can circulate multiple times in the economy, thereby having a compounded effect on aggregate expenditures. For example, an initial government expenditure increase leads to subsequent spending rounds (workers spend their incomes), illustrating the multiplier effect. Hence, supplemental unemployment benefits could result in a total rise in aggregate expenditures that exceeds the original amount of the benefits provided.
This increase in spending can help move the economy closer to its potential GDP, as it stimulates demand, which businesses respond to by increasing production and potentially hiring more workers. However, these are short to medium-term effects, and the long-term impact would depend on various factors, including the duration of the benefits and the state of the economy as it recovers.