Question

I need an detalied explanation about how COVID-19 pandemic effects any countries economy in short term and long term. In the examination part, we have to touch economic growth, inflation, unemployment, trade deficit and public debt stock.

Assume that this country's monetary and fiscal policy are in very expansionary mode.

Please explain the concepts in detail. Thanks.

Answer 1

COVID -19 have a devastating effect on the countries economies. although the countries have taken various economic measures like expansionary policies may be fiscal or monetary or both to overcome this situation. In general, COVID-19 has pushed the economy into a recession which is unusual to any of the previous crises. so here the implementation and effect also expected to be a little different from the previous experiences. the impact of COVID-19 on growth rate is negative as the whole production process slows down or stopped. so the overall economic growth process slowdown or stoped.

coming to the inflation it is very high due to the unexpected stop in the production but the demand for the product is as usual or maybe more due to unexpected panic. so the inflation rate shoots up.

The most seriously affected area is unemployment. some of the countries been expected to reach the unemployment rate as 50% due to the lockdown and jobless in a pandemic.

Here the trade deficit is also high as the necessary goods are been imported like the medical help and kits but at the same time government could not pay it due to the emergency. so there is an expected huge deficit.

In this pandemic situation governments declaring some stimulus package for the public . at the same time, people are losing their jobs, so it raised the unexpected burden of public debts for years.

Expansionary Fiscal Policy:

So in this policy government tries to take some positive measures to enhance the aggregate demand and that will enhance the production and restore the potential level. so in this policy government will do expenditure or spend money or announce stimulus package to upgrade the level of GDP. here in the given figure, the initial equilibrium level of price is P1 and quantity/real GGDP is Y1 after fiscal policy implementation there is a shift in aggregate demand and the new potential level of output/GDPisw Yf and price is P2. The other types of expansionary fiscal policy are tax reduction, which enhances the disposable income, and that shifts the aggregate demand curve.

Expansionary Monetary policy:

Expansionary monetary policy is another measure to control the recessionary impact. under this policy, the government will go for open market operation and in this process, they buy the government bonds and that increase money supply in the market so real money increase in the market, and that shifts the AS curve to AS1. So it has an impact on the interest rate and it decreases. with a decrease interest rate, the investment will be more and that leads the output to potential level i.e Yf.