Question

1) In your opinion, what are the two most important tools/programs that have been implemented this year by the Federal Reserve and the US Congress in their attempt to fend off a deep Covid-19 based recession? What evidence do you have in actual results or from an example in the textbook?

2) In your opinion what are a few potential long term effects of these actions on the economy?

Answer 1

The Corona Virus Pandemic has caused big concerns among economists about the probable results that the lockdown may have for companies and consumer consumption alike.

With companies shut, most people demanding only for essential goods and services, the end result is that people are finding it increasingly tough to manage their enterprise and to pay its workers. Over the months of lock down people believe that job crisis may come and lead to global recession which may reduce aggregate demand and supply.

In the United States however, two critical organizations which help to balance out this effect are the Federal Reserve and the government. The following are the key actions taken by the bank and the government which will help in the economy regaining some level of expected control.

Federal Reserve:-

In my opinion, the biggest policy tool used by the Federal Reserve to mitigate the risk, is to lower the Cash Reserve Ratio of commercial banks to 0. What this means is that banks now have the free hand to distribute credit as much as they would want to subject to credit ratings of the individuals and companies.

A 0 level of Cash Reserve Ratio would also see an impact on the lending rates in the country. If the lending rates go down and banks have sufficient money to give away on loans added to the fact that the interest earned by consumers on deposits would reduce as banks would have extra money to generate these loans, the overall spending in the economy is expected to rise post the lock down ends.

This increased spending would increase the aggregate demand and help in keeping the Gross Domestic Product well cushioned.

Government:-

During this critical time of disease wherein health care expenditure as increased substantially the government has taken strict measures to ensure availability of capital for the health care sector by pushing forward, 8.3 Billion Dollars towards the "Coronavirus Preparedness and Response Supplemental Appropriations Act" which became a law on 6th of March. It provides funds to the Centers for Disease Control and Prevention (CDC) and to other key federal agencies which provide critical health care support.

This ensures that people spend minimum amount from their pockets to tackle this pandemic. Further, to keep unemployment in check, it enacted the "Families First Coronavirus Response Act" which aims at providing unemployment benefits, expanding the food assistance programs during lockdown and other similar measures to cushion the industies.

Effects:-

In my opinion, the end result of the action taken by the government and the Federal Reserve would be such, that the Aggregate Demand for goods and services would start to rise over the years. Further, the general price level would rise and so would the gross domestic product.

This is further explained with the help of the following diagram:-

Here we can see that price moves from P1 to P2, GDP grows from Y1 to Y2 and Aggregate demand shifts from AD1 to AD2.

Further, the Supply also changes from point P1 Y1 to point P2 Y2.