Question

"Some of you may have already picked up on this, but any discussion about the COVID-19 crisis will undoubtedly include a number of superlatives like “highest ever,” “most on record” and “unprecedented.”

Last week’s events were no exception. A head-spinning 6.6 million Americans filed new claims for unemployment benefits, bringing the two-week total to 10 million. That’s more than the combined populations of Los Angeles and Chicago."

The above is an excerpt from a Forbes article (Links to an external site.) posted April 6, 2020. If we are experiencing a higher rate of unemployment than the natural rate, what actions might the Federal Reserve take to improve the economy?

Answer 1

The given case talks about the current situation in the US which says that the unemployment rate has grown drastically as a result of the corona virus crisis that has hit the world economy in general and America in particular with the amount of cases and deaths it has witnessed. The statistics says that the US economy now holds more than 22 million unemployed population, most of them who have been the new entrants as a result of this crisis situation. With rising unemployment levels, the unemployment insurance claims have also seen an upsurge. The following are believed to be the major reasons for a drastic fall after the crisis has hit the economy

· Majority of the US firms are international corporations which works on international exchanges of work. With the lockdown measures implemented after the crisis, much of international exchanges have been stalled which has lead to fall of employment.

· Majority of the industrial units have been shut down

· The tourism has been completely stalled which has hit all the sections of the people who have been dependent on the tourism sector for their jobs

· With the lockdown measures, much of the transport system and trade networks have been stopped which has caused the production to decline forcing many companies to put off its employees

· Majority of the potential population have been affected by the virus which have made them industrially inefficient to work and thus have been pulled out of the work force.

                                      The Federal reserve is responsible to introduce various monetary policies and economic stimulus so as to deal with such situations. With rising unemployment, the following actions could be taken by the Federal Reserve to improve the economy and bring back the employment potential of the nation

· Employee centred economic stimulus packages can be introduced like improvements in employment insurance policies, raising the minimum wages etc.

· The interest rates in the country should be decreased so that savings are non-attractive and much money is sped in the economy which could prevent the economy from going in to deeper recessionary incidents.

· With decreasing interest rates, industrial investments would rise which means that more employees would be now required for industrial production which could boost the employment sector

· The reserve requirement of commercial banks to be maintained in the Federal reserve could be reduced which could help the banks to provide more amount of credit for developmental activities.

· The reserve money with the banks could also be raised so as to help them to meet unexpected failures in the market.

· Introducing stimulus packages to improve the local economy could help to raise many jobs within the economy and could help to avoid dependence on other economies.

                                            Thus, we can see that the Federal reserve should focus on expansionary monetary policies in the short run so as to maintain the monetary flow in the economy and should focus on employee centred policies so as to bring back the production levels to normalcy which could improve the GDP of the economy and thus could help in bringing back the economy to normalcy in the long-run.