Answer
a) Please see the graph. The output falls (from $Q_1$ to $Q_2$), and the employment level also falls. The income level also falls.
b) The economy, over time and without assistance, will return to $Q_1$ output. However, the price level will fall to $P_3$. This would happen over a matter of years.
Work Step by Step
c) The natural restorative powers of the economy should make the policyholders passive in their response to the business cycle. If the policyholders choose to be active, then the policyholders would have to use extraordinary measures if the economy enters a recession.