Question

Assume the pandemic dies down before the summer, at which time the lockdown closes. Analyze possibilities for a fast financial recuperation across three situations (1) no unemployment insurance of any sort, (2) unemployment insurance benefits at the pre-pandemic levels, and (3) unemployment protection benefits under the CARES Act.

please give a descriptive solution, using junior year economic vocabulary. Thank you.

Answer 1

(1) If there is no unemployment insurance of any sort, the automatic stabilizers are not being utilized. There will be a negative demand shock as the unemployed do not have the resources to purchase goods and thus, even after the negative supply shock situation due to the pandemic is resolved by the summer, the lack of demand will continue to hamper economic growth and the economy can not grow fast enough

(2) Even unemployment uninsurance at pre-pandemic levels won't be enough. The pandemic has the potential to create job loss at a scale that is no seen before as seen by the huge jump in the number of people filing for unemployment benefits. A policy that worked in normal times will fail to sustain the economy in a downturn. By the time the lockdown closes, the temporary demand shocks will become permanent due to lack of action and quick financial recuperation should not be expected.

(3) The CARES act is $2 trillion relief package greatly increasing the unemployment benefits for the people. This is the best policy as there is an urgent need to provide the most vulnerable sections with liquidity to purchase goods. If these people can be sustained until the lockdown is applied, they will be ready to rejoin work and participate in rebuilding the economy once the lockdown is lifted. There will be an increase in the fiscal deficit for the government but that will be compensated by long term growth and increased future revenues. A strong fisal boost is necessary for quick financial recuperation.