Question

Discuss the economic policies conducted by policy makers in the United States in response to the spread of COVID-19. Discuss how effective these policies are in dealing with the economic consequences of this event. Please back your statements with applicable Macroeconomic concepts and such :)

Answer 1

There has been both monetary and fiscal policy action being undertaken to counter the effects of Covid-19 on the US Economy.

The Federal Reserve Bank, without waiting for the official policy rate announcement date, cut the fed funds rate by 50 basis points. in normal circumstances, this is a big cut and has further brought interest rates close to 0 in the US leaving little room for further policy cuts. The idea is that it will make it easier for constrained businesses to borrow and operate in times when their profits have gone down massively. Monetary policy can only have little impact when it is the actual supply chains that are broken. If the workers are not turning up for work due to health reasons or the supply of raw materials has declined due to several border restrictions, interest rate cut can not help the businesses get back on track. The Fed has also started buying a lot of government securities (quantitative easing) and cut the reserve requirements, further trying to ensure liquidity and easy availability of credit.

Fiscal policy is being considered more important because of the direct impact it can have on stimulating demand in the economy. One of the reasons of falling demand is that a majority of poor workers engaged in sectors like construction, manufacturing becomes unemployed or underemployed as they fall sich or firms cant produce as they face shortages. These people see falling incomes and as a result, the demand drops. The US government has already signed a $2 trillion relief package program that will try to mitigate the situation by injecting some liquidity in the hands of the people. This includes payment of $1200 dollars to a lot of individuals, providing funds to small businesses and an increase in unemployment benefits. These measures aim at keeping a stream of income for the most affected by the virus, economically.

The general consensus is that in order to minimize the damage to the economy which is already huge, the focus should be on supporting the healthcare sector with every last penny as time is of utmost importance in the economic fight against Covid-19