Question

How will the U.S. loan market be affected by the pandemic of COVID-19?

State your understanding and carefully explain your arguments with economic tools and/or economic intuition, including the aspects of

1. demand of credit;
2. supply of credit;
3. commercial banks’ reaction;
4. equilibrium price and quantity without considering government actions;
5. equilibrium price and quantity, given that the Fed injects money into the banking system in order to stimulate lending.

Answer 1

The US has been great in fiscal stimulus of 484 billion dollars and US Fed unlimited bonds buying programmes worth 2 trillion dollars with rate cuts, CRR and SLR and liquidity coverage ratio cuts. Triggering automotic stabilizers and combined above policy will help alleviates financial distress and grow economic growth throufh higher consumption and disposable incomes.

The supplyvof credit availability rises causing its demand to go down considerably.

Sijce the interest rates are cut, the banks shall transmit easier loans availability at lower rates and thus loan markets will grow enormously.

However the cases has risen to 1 million approximately and states have been relaxed and thus caused havoc.

To avert this crisis, US must impose lockdown and gradually ooen economy using partial lockdown only after 2 months of complete lockdown. Major boost towards creating vaccination and healthcare for curing patients is required.

Negative impacts for not imposing lockdown :

Coronavirus has had huge impact on economic growth due to lockdown and shutdowns and social welfare losses.

The economic growth remains subdued as Aggregate demand and consumption both fall simultaneously also leading to fall in prices and inflation.

Investment is pumped out due to falling interest rate regime and lower economic outlook of companies.

Government spending is ramped up due to an expansionary fiscal policy by reducing taxes and spending. Also net exports go negative as imports surge due to supply shocks.

Negative growth in GDP causes high unemployment ajd lower inflation based on Philips curve movement.

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