Question

The COVID virus has had an impact on all faucets of our economy. Please discuss the impact it has had on each of the variables below over the net 12 months. Explain if they will increase, decrease, or remain unchanged and the reasoning behind your decision. You do not have to cite the textbook, but all other sources should be cited according to APA format.

proper explanation required

1. C (consumption)
2. I (investment)
3. G (government)
4. Imports
5. Exports
6. Taxes
7. Government budget (T-G)
8. GDP
9. The value of our dollar in comparison to the US dollar.
10. The unemployment rate
11. The supply of money (M1)
12. The prime interest rate

Answer 1

Since a lot of people become unemployed due to the crisis and will lose income they can't consume and C will fall. Since supply chains are broken and firms can not expand due to shortage of labor, Investment I will fall. The government has to pay a lot in terms of relief measures for the unemployed, expenditure in healthcare etc. so G will rise substantially. Both imports and exports will decrease as there are a lot of restrictions put on the international movement of goods and labor. Moreover, countries will look to meet the domestic needs first in a crisis like this. Since incomes are falling, the tax collection will decrease. The government budget will be in deficit i.e decline as expenditures will be more than tax revenues. Due to all the above factors, GDP will fall sharply and may even enter a recessionary phase. Since, most of the investors view US treasury bonds as a safe investment especially during a crisis, the demand for USD will rise and it will appreciate to our dollar. The unemployment rate will increase greatly as firms use massive layoffs as their profitability declines. As a monetary measure, the central bank will try to provide liquidity into the system by increasing the supply of money (M1). The central bank will cut the prime interest rate to ease the conditions for businesses and borrowers to tackle the already bad economic situation and provide monetary stimulus.