Question

Summarise the various forms of fiscal policy responses to the current pandemic around the world. Given these responses, what are the risks of the current stimulus policies?

Answer 1

Hi,

Hope you are doing well!

Question:

Answer:

Fiscal policy is a policy that is adopted by the government during the different market conditions by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. There are two type of fiscal policy - expansionary and contractionary. Expansionary fiscal policy is type of fiscal policy in which the government increases spending and cut taxes to boost the economic growth. The contractionary is opposite of an expansionary fiscal policy. In this policy the government decreases spending and raises taxes.

We all know this time the world is facing a pandemic due to Corona virus. During the COVID-19 pandemic the world economy is got shrunk worst and growth rate got entered into a negative zone. Unemployment have increased rapidly and inflation is very low. The major reason of recession or crisis is decreasing AD rapidly. AD is directly affected by consumption, investment, government spending and net export. During the recession or COVID-19 crisis decreased rapidly and decreasing AD have decreased output and price level at the worst level. So, to boost the economic growth the governments have adopted expansionary fiscal around the world through increasing spending, taxes cut, tax relief, direct transfer and other stimulus packages. The government have increase spending on health, unemployment benefits and other social securities schemes. This is basically a major health crisis so, its increased spending on public health rapidly. During the crisis million of people have lost their jobs so, its increased spending on unemployment benefits globally. Other side the governments have issued billion dollars stimulus packages to support the SMEs and increasing investment and to maintain a satisfactory level of unemployment or decreasing unemployment. Other side the government have supported to the public through direct transfer plans to boost the consumption level because consumption contribute for 61% in AD and play a vital role. When AD increase its increase output and price level.

There are some negative side effects of this fiscal support. Like it can increase inflation and create difficulty in achieving the target or goal regarding the growth rate, inflation and unemployment. Other side its increased fiscal deficit of the governments that will increase GDP-Debt ratio globally. When the fiscal deficit increase, the government borrow money to fulfill the gap between revenue and spending. increasing debt harm to the economy worst in the long-run. It increase dept payment burden on the government that further damage fiscal balance and exchange rate and other important factor of the economy that together negatively affect the economic growth.

Thank You