Question

1.create an aggregate demand and aggregate supply model below to explain changes in the economy as a result of covid-19.

2. how will the cares act affect the U.S. Economy, including changes in fiscal policy, proce level, AD, real GDP and unemployment. INCLUDE A MODEL GRAPH.

3. explain the impaxt of the CARES Act on the Federal Budget.

Answer 1

Answer to Part 1 & 2)

The Covid 19 situation, is causing grievous concerns for the economy of the United States. The core reason behind this is the lock down of people and financial institutions alike. On one hand, the aggregate demand for goods and services is falling rapidly as people have no choice, but to stay indoors, and on the other hand, unemployment levels in the economy are set to rise, as companies would surely shrink their overall cost by reducing the number of workers.

The resultant is a sudden decline in the gross domestic product of the country which is the final value of all goods and services and the overall productivity in the nation will surely decline.

To counter this, the Government of the United States has adopted the Cares Act as a method to come out of this recession which has been causing deep concerns in the eyes of every economist.

The Act has provisions of up to 2 trillion dollars in which the government would be providing tax breaks to individuals as well as to corporate houses to ensure liquidity of money. As people have more money and they do not have to pay taxes, their income would increase.

The act also puts into place health are investment which is seen as an increasing cost due to the pandemic which may impact larger sections of the society than ever. It would also include, fund allocation towards low cost loans for students as well as commercial establishments as well as increased government spending in numerous other sectors as well so that the flow of money in the economy can be increased.

The impact would be a counter strategy to the situation already prevailing. It would give people more money in their hands, as taxes are slashed and money is directly transferred to them.

Further, as far as the government budget is concerned, it is surely going to increase as the government would take additional debt, to cover its cost of expenses which it is incurring. Government takes money from the general public, or through international institutions such as the World Bank or funds through its reserves such programs which tend to bring back the country into equilibrium

A graph explaining the effect is as follows: -

Here, we have indicated three different aggregate demand curves on different prices on the Y axis and different quantities on the X axis. Here, we can see, that the equilibrium quantity earlier, was at P3 Q3 on Demand Curve AD.

Post the corona virus lockdown, the same shifted to AD1 curve in which price was P1 and Quantity Demanded was Q1. Post implementation of the Cares Act, the same lifted to Q2 and would be expected to rise to natural equilibrium in the future due to similar policies.

Please feel free to ask your doubts in the comments section if any.