Question

Write a paper on the coronavirus effects on US: GDP, economic growth, employment, inflation, consumption, investment. What policy can help: fiscal or Monetary or both?

Notes: At least 5 pages, with data and graphs. It is mandatory to do the paper.

Up to 10 points added to final grade.  

Answer 1

Introduction

The Corona virus has correctly been defined as a pandemic by the World Health Organization. It has caused grevious problems for the entire global world as world leaders continue to find ways of fighting the disease. Worst hit are 3 countries which are the United States, China and Italy. But up and above the health concerns of people, the global economy and that of the United States is surely headed for a economic slump and Recession as per the estimates of top economists across the globe.

The following are graphs and explanation of key economic variables.

Case Specifics:-

As the United States goes into a state of lockdown in which no movement is allowed, the problem of economic slow down is real. Companies which run on production and others are all shut to avoid the pandemic any further. This will in turn lead to long term issues for the country.

The demand for products and services has fallen to an all time low because of the standstill. Essential items though are still getting produced and the prices of the same would rise, when it comes to the general price levels they will indeed fall.

This is because most of the labor force across the country would indeed end up losing their jobs. Now in that scenario, the available money in the hands of people would shrink which would lead to them demanding lesser. As a result the supply would further shrinkt to match the decraesed demand and the overall Gross Domestic Product which refers the the final ammount of goods and services produced is said to decline.

Overall consumption and investment would see a huge decline as more and more jobs are lost, companies are shut and the money available with the private sector exhausts.

The following graph will help us in understanding the same:-

Here we see that the aggregate demand goes on declining and the price level shifts from point Y1 to point Y2 as a result, the general price level shifts from point P1 to P2 indicating a decline in the economy.

Ideal Response:-

The Federal Reserve sets in the Monetary Policy whereas the government is responsible for setting in place the Fiscal Policy. In my opinion, in a situation like this when growth is declining, and the average price levels for all products and services in general would fall leading to wide spread unemployment and lack of demand the ideal thing to do is to follow both a Monetary and Fiscal expansion strategy.

A clear explanation of the same is as follows:-

Monetary Expansion:-

Monetary Expansion is a strategy whereby the Federal Reserve increases the availability of capital in the economy. This is done by reducing the interest rates which the Federal Reserve charges from the Commercial Banks. It also alters key things such as the Cash Reserve Ratio which refers to the minimum balance which must be maintained with the Federal Bank to engage in operations.

When this happens, the availability of credit in the economy sees a rise and companies find it easier to finance themselves. Due to reduced interest rates, consumers get little money on the investment in banks and they begin investing in stock markets or use the money available to consume more items thus taking the economy towards a pleasent situation.

Fiscal Expansion:-

The fiscal expansion is done using taxation and government spending as the medium. Tax reduction leads to a situation wherein people have more money to spend. Whereas increased government spending can stimulate the economy in the form of new investments. Infrastructure building helps the economy in getting more overseas investments. The United States government also can increase unemployment benefits and higher social security to allow for easier relaxation.

Resultant Graph:-

Once, the Fiscal and Monetary expansion has been done the result of the same is as follows:-

Here we can see that once the same has been implemented, the price levels in the economy begin to rise. AD represents the Aggregate demand which increases along with Real GDP in the economy, The Aggergae Supply Increases from point P1 Y1 to point P2 Y2 thus the economy stabelizes with the efforts of the Federal Reserve and the Government respectively.

Please feel free to ask your doubts in the comments section if any.