Question

The current administration is offering the 2 trillion dollars stimulus package to maintain the loss due to the unprecedented chaos caused by the coronavirus.

Categorize each item into monetary policy versus fiscal policy.

Explain how each item of this package can help the economy.

Answer 1

A stimulus package refers to a package by a government for the economic measures for stimulating a floundering economy. The main goal of the stimulus package is to reinvigorate the nation and reverse or prevent a recession by boosting spending and employment. The U.S. Senate on March 26, 2020 voted for an approval of a stimulus bill amounting $2 trillion for providing the relief to individuals, families, small industries and businesses impacted due to the slowdown of an economy caused by the coronavirus pandemic. It is coordinated effort for increasing the government spending and lowering interest and tax rates for stimulating the U.S. economy. The stimulus package is in the combination form of a monetary stimulus and fiscal stimulus.

Monetary stimulus: The Federal Reserve reduced the rates of interest on the discount window by 1.5% to 0.25% along with $700 billion in quantitative easing (QE) or asset purchases. he lower rates will encourage lending and spending by consumers and businesses. The capital requirements for banks are lowered. The banks are also encouraged by Fed for using the liquidity and capital buffers to lend, which are funds reserved to face the hard times. A fall in reserve requirements is expansionary because it raises the funds available in the banking system to lend to consumers and businesses.

Fiscal stimulus: President Trump on March 6, 2020 approved spending bill for $8.3 billion for fighting the pandemic, currently termed to be the "Phase One" for the stimulus efforts. House of Representatives in U.S. approved an aid package totalling $2.2 trillion including a fund for $500 billion for assisting the hard-hit industries and a up to $3,000 direct payments of to millions of families in the country. It will be a great help in restoring the economy to its natural level to real gross domestic product (GDP)