Question

Identify 3 actions that you would take to improve the macro-economy. Use at least 1 fiscal policy action and 1 monetary policy action. Explain the actions, the problem, and how the action will cure the problem.

Answer 1

To identify what actions must be taken, first it is important to identify its need, i.e. the macroeconomic problem that it will aim to solve. Leaning on the present context of the global economy, the recovery from the slowdown caused due to the COVID-19 outbreak seems to be a possible aim. The fiscal and monetary policy methods that can be used to help nations come out of the slowdown are as follows -

1. Monetary Policy: Reduce interest rates - The Federal Bank of different nations should aim at lowering interest rates to incentivise consumer spending more than saving and also to incentivise investors to invest, businesses to invest more in productive activity because the cost of borrowing is low. This will go a long way to increase the output and at the same time increase the employment levels which have come down in these last few months. With increased output, the incomes of people will rise, which will further increase their purchasing power and increase aggregate demand in the economy. That will in turn further incentivise more production and more income.  

2. Fiscal Policy: Government spending - The government should actively engage in productive projects that will increase employment in the economy like construction, infrastructure, etc. This will be necessary to revive the informal sector of the economy that has been majorly impacted by the nation-wide lockdown. In addition, the government should actively put into place the social security benefits and cash transfers to those sections of the society that have suffered massive income displacement because of the pandemic, mostly the daily-wage workers. This will help in increasing the aggregate demand in the economy as the marginal propensity to consume for these groups will be much greater than the ones who are comparatively well-off.

3. Trade: It is important for countries to re-engage in active international trade. This has to be done by conscious and cooperative efforts by all the national governments. This is important to boost the export sector which does form a major portion of a nation's income. The pandemic has reduced international trade with prices of certain commodities on the fall ever since. It is important to revive this sector to boost production and create income. Most countries are looking a self-sufficiency in the wake of this pandemic and the lack of international trade will greatly affect the export oriented industries. This is also another major macroeconomic variable the countries should be looking to mend.