Question

How does stimulating the economy during Corona Virus differ from stimulating the economy during the Great Recession? What might be some of the long run costs of the stimulus package?

Answer 1

Stimulating the economy during the time of Corona Virus differs from stimulating the economy during the time of Great Recession because during the time of Great Recession, government only had to increase aggregate demand manily consumption and investment spending to overcome recessionary gap in the economy. The supply chains were not disrupted, though global spply chain was but domestic supply chains were not affected. However, in this case stimulus packages are needed not only for the demand side but also supply or production side as both domestic and global supply chains have been disrupted.There needs to be a structural change in the way agriculture, manufacturing and service sector is functioning currently. Also, the pandemic involves government transfers to workers in unorganized sector of the economy who are daily wage earners. Thus, it requires more amount of fiscal stimulus than in the case of Great Recession.

The long run costs involve huge rise in government debt because expenditure has to increase to prevent demand shock in the economy. But government should not worry about this cost in the long run because it is needed to prevent depression in the economies.