Question

The corona virus pandemic has been, and will be, very costly to federal, state, and local governments as well as to businesses and to consumers. According to the Congressional Budget Office (2020):

CBO expects that the economy will contract sharply during the second quarter of 2020 as a result of the continued disruption of commerce stemming from the spread of the novel coronavirus. The following are CBO’s very preliminary estimates, which are based on information about the economy that was available through this morning and which include the effects of an economic boost from recently enacted legislation.

• Gross domestic product is expected to decline by more than 7 percent during the second quarter. If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however.
• The unemployment rate is expected to exceed 10 percent during the second quarter, in part reflecting the 3.3 million new unemployment insurance claims reported on March 26 and the 6.6 million new claims reported this morning. (The number of new claims was about 10 times larger this morning than it had been in any single week during the recession from 2007 to 2009.)
• Interest rates on 10-year Treasury notes are expected to be below 1 percent during the second quarter as a result of the Federal Reserve’s actions and market conditions. (Swagel, 2020, para. 1)

How will the decline in GDP and the rise in unemployment, and low interest rates affect federal, state, and local governments?

Answer 1

It is known that Coronavirus pandemic will be costly to every economy. According to report of Congressional Budget Office (2020), economy is moving towards recession as Gross domestic Product is expected to deline by more than 7% which could be even worsen if there is no production at all. Decline in GDP will decrease the demand for money as there are less products available in the market to purchase. Fall in demand of products will lead to fall in demand of money with constant money supply. As there is less demand, interest rate will fall due to relation between interest rates and real money. This demand relation will also effect the foreign exchange rates.

With all this happening in the economy, business will be also effected and start to deploy their labour power which will increase unemployment much more higher than 2007 recession of US economy. Business can't reestablish themselves as there is less amount for borrowing from fund market. There are chances for liquidity trap in the economy as this has been happened in some of asian economies.

Umemployment rate is also expected to rise above 10% and more people are claiming for unemployment insurance. As people are unemployed, they will have less money with them and they will demand less. There is less money in circulation in the economy, this will create repercussion effects in the economy of low GDP and low interest rate. As financial market is squeezing, there will be less fund and less employment generation. Federal is also spending much amount of GDP in healthcare facilities, so there is no money supply happening from the side of federal. Interest rate on treasury bills is also decreasing due to actions of Federal and market conditions.

Federal, state and locals governments need to deal it with available funds and think of other measures to cumbersome these effects on economy. Since, all these are affecting the economy devastically and economy could get out from this downward sprial by funding more and recover the economy in next coming quarters. Businesses will again start production at high level and GDP will start to boost once again.