Question

Recently 2019 Nobel Prize winners and MIT economists Abhijit Banerjee and Esther Duflo (Links to an external site.) discussed the COVID-19 crisis and had the following exchange:

“ED [Esther Duflo]: Back to world economics. We have seen there is a conflict between life and livelihood. This is the most troubling question of our time. How do you feel about it?

AB [Abhijit Banerjee]: I am not going to say how I feel very conflicted. What is most important is to recognise [sic] nobody is going to take this forever. Imagine if a government succeeds in giving effective free PDF, it will not be enough. In a country like India, if the government says there is free food for the next six months people will not accept. People are accustomed to a better life. Sustainability is a key concern.

The lockdown is short and this is sensible. Hopefully that will have some slowing effect. Then you have to let go people. And you have to do a more targeted strategy, hotspots etc. We surmise we will have to fight a battle of around six months. We surmise there will not be too much damage. But the world economy will be in a free fall. Rich countries will be in a lockdown. They are not going to buy anything. The whole world economy is going to shrink. That is a complete given. We are going to see a massive recession.

The question is, in some sense, is this a recession because it is not driven by rich people losing their income and middleclass people losing their home? That there will be a little bit of slack? And once this is over people will start buying.

I think this is less and less likely. The stock markets have collapsed. Middleclass income has shrunk. There will not be a consumption boom at the end of this. Therefore, we will need policies, which will be able to keep the system going. Revive the demand. People will have lost so much income and so much wealth that they will sit on what they have and not spend. That is the core worry.

Is it the end of Second World War and people will start buying things or is it the middle of 2009 crisis and people are afraid to spend? I do not know the answer to this. But I am pessimistic. If this is so more intervention is the way to go.

I think in India we are being too conservative. Oil prices are low. Print some money and do not think of inflation. We need to be quantitative in India and in large sums.

ED: The issue is how to reach money to the people.

AB: In USA as well. This is a time to go wild. Go Keynesian” (Banerjee & Duflo, 2020).

Banerjee and Duflo feel the economic issue that needs to be addressed is demand and getting money to people so we can consume and increase output. They also seem skeptical that there will be lots of pent up consumption once the lockdowns are lifted.

Do you agree, disagree or would you amend Banerjee’s and Duflo’s arguments in light of our fundamental equation (Y = C + I + G + NX) and the aggregate demand and aggregate supply model? Briefly explain.

Answer 1

In the United States and around the globe, destitution is fueling the spread of COVID-19 and making it all the more lethal. Authorities are highlighting financial imbalances and obstructions to medicinal services as driving reasons why the novel coronavirus is excessively influencing dark and darker Americans. Lockdowns in nations like India and Zimbabwe have constrained numerous to settle on the danger of the infection and the assurance of going hungry in the event that they comply with social removing orders.

There's another gauge that COVID-19, the infection and the reaction to it, could clear out portion of all employments in sub-Saharan Africa. Specialists dispatched by the foundation Oxfam additionally caution the pandemic could push a large portion of a billion people into neediness in nations that are as of now low-pay.

As the universal network scrambles to help low-pay nations climate the pandemic, it's not in every case clear how help cash will contact the individuals who need it.

There is no exchange off in poor nations between helping individuals support themselves monetarily and getting the wellbeing conditions to improve.
In such a case that, one can't guarantee individuals that they will have the option to eat later on, at that point it will be incomprehensible for them to remain at home.

It shouldn't be a great deal of cash — sufficiently only to get by while they are remaining at home and not working.

It's particularly basic for low-pay nations to guarantee individuals can purchase fundamental necessities. On the off chance that a section of the populace quits purchasing things like farming products, it could prompt an a lot bigger financial emergency.