Due to the covid-19 pandemic, the US economy entered a downturn that would eventually lead to...

Due to the covid-19 pandemic, the US economy entered a downturn that would eventually lead to recession. Explain how Fiscal policy should be used to help the economy. Who do you think is most affected economically by this pandemic, consumers or producers? Explain your rationale.

Expert Solution

Expansionary fiscal policy is used to pull out the economy from recession. This is done in two ways.

A decrease in personal income tax will increase disposable income, which will increase consumption and aggregate demand. A decrease in business income tax will increase firm profitability, which will increase investment and aggregate demand. Therefore a tax cut will increase aggregate demand.

An increase in government spending will directly increase aggregate demand.

The pandemic has affected producers in the immediate and short run. This is because of production disruption due to which firms are unable to produce output (owing to movement constraints, stay-at-home and social distancing norms). However, since firms are not cutting jobs right now, consumer income is unchanged in immediate and short run, so they are affected less. The main convenience that consumers are facing are not an income loss, but availability and choice of goods and services for purchase.

Rahul Sunny answered 7 months ago

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