Question

1. Suppose that you are a member of the Council of Economic Advisers. The president has asked you to prepare a statement on the question, “What is the proper fiscal policy for the next twelve months?” Prepare such a statement, indicating (a) the current state of the economy (that is, the unemployment rate, growth in real income, and rate of inflation) and (b) your fiscal policy suggestions. Should the budget be in balance? Explain the reasoning behind your suggestions.

Answer 1

The COVID-19 has led to the deterioration of economic conditions in the USA and across the world. Economic activities have come down drastically.

In the first two months of COVID-19, over 10 million people have lost their jobs. The aggregate demand has declined significantly, the growth rate is down. Thus, the government needs to increase its expenditure level or expansionary fiscal policy must be followed by the government. The present stimulus package by the government is not sufficient to bring the economy back to the growth trajectory. Thus, government must continue to increase its expenditure to drive up the aggregate demand in the economy.

Government can not maintain the balanced budget during the period of recession. If government goes with the balanced budget, then there will be a rise in the unemployment further, Government has to make the deficit budget to correct the problem of recession and unemeployments.