Question

The Covid-19 situation has triggered an economic crisis and created massive economic hardship globally. Unlike the 2008-09 financial crisis, the Covid-19 crisis began in the real economy, not in the financial sector. Its effects have, however, propagated to the financial side of the economy.

a. Policy responses: Governments and Central Banks have implemented a number of policies to mitigate the economic damage from Covid-19. Describe in detail the policies that fit in the (i) fiscal policy category, and (ii) those that fit in the monetary policy category. Provide as much detail on the policies as possible and explain briefly how they work in the current context.

b. Private sector responses: The private business sector has many options to respond to the economic crisis caused by Covid-19. Describe in detail the different options that are available to private sector operators. Identify any interactions between their actions and some of the fiscal and monetary policies you identified in part (a). Do you see sectors that are more heavily exposed than others? Discuss.

Answer 1

Government has adopted expansionary fiscal policy by reducing taxes and inducing higher spending and structural changes as well as automatic stabilizers are triggered.

The central bank too adopts an expansionary monetary policy by reducing interest rates, cash reserve ratios and statutory liquidity ratios and bond buying programmes to inject liquidity in market.

Both policies help induce higher disposable incomes and higher consumption which leads to rise in economic activity and aggregate demand and thus real GDP anf inflation both rise in tandem.

Private sector too boosts spending through donations and public private partnerships models to revive economic growth and eliminate crowding out effect. This integrates with expansionary fiscal policy by government.

Sectors with high burgeoning debt like banking, utility, power, manufacturing, airline and automotive are glooming sectors as their economic operations are stalled.

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