Question

please list the recent monetary policies implemented by the Fed to support the economy due to the outbreak of COVID-19 in the US. Choose one to analyze using one or all of the ecomonic concepts. -aggregate demand, imcome transfers, fiscal policy, recessionary gap GDP, keynesian model, marginal propensity to consume, multiplier effect.

Answer 1

The Corona Virus Pandemic has caused great concern among economists about the financial implications which may arise as a result of the economic lock down being implemented in the United States and in other similar areas.

The end result is that the government and the Federal Reserve require taking serious measures to ensure that the economy may function in a smooth and effective manner.

The Federal Reserve in March started implementing different policies to allow for the market to expand and the flow of money in the economy to increase. Two of which were Implementation of Quantitative easing and Reduction in the Cash Reserve Ratio Requirements.

Through the implementation of Qualitative easing, the Federal Bank purchases government backed securities in the market which banks and other players hold. This purchasing increases the availability of funds in the market thus creating demand and stabilizing the overall economy.

The other key method is to reduce the Cash Reserve ratio which is the minimum amount of money which the commercial banks must hold at any given point of time to operate in the market. With the events as such, the demand for credit has decreased substantially. So, to give a boost to the same, the rates were kept at 0 meaning that no amount of money needs to now be deposited with the federal bank, and commercial banks have a free hand in distribution of credit.

The net effect on key parameters is as follows: -

Aggregate Demand: -

The relaxation provided to banks to give away credit as well as the addition of money in the economy would raise the overall capital for a bank and thus reduce interest rates giving them the edge to give away credit. This will have a positive effect on aggregate demand as the availability of low-cost credit rises during this time.

Income Transfers: -

During this time period, income transfer increases from the government to common citizens. This is a resultant of the increase in capital with everyone from corporate houses to banks as they receive cheaper credit which helps them in expanding business and making more jobs available.

Fiscal Policy: -

An expansionary Monetary Policy by the Federal Government acts as a way of the government to know which direction it should take the economy. Thus, the stimulating packages being offered by the Trump administration is a response to the existing monetary policies as described above. The effect of a monetary policy change has an equal effect on fiscal policies.

Recessionary gap & Marginal Propensity to Consume: -

As described above, a recession takes place in any economy, primarily when the desire to consume declines. In the current situation, the demand for most things is at a standstill. Due to easing and increasing the availability for credit, the recessionary gap can be minimized and the propensity to consume increases as people get easy availability of goods and services at correct price points.

GDP: -

The gross domestic product or the value of final goods in the economy is of equal concern for the United States. Due to the decline and lock downs in place, the GDP is most likely to reduce in value.

The GDP will come back into place with the application of the new Monetary Policy which reduces key interest rates for the people.

Keynesian Policy: -

The Keynesian Policy simply states, that the aggregate demand push due to the decrease in interest rates would have an equal effect on supply and employment in the country. As the demand for goods and services increases, the supply factor also changes and leads to a shift in the aggregate supply curve for the country.

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