Question

Congratulations! You have been appointed an economic policy advisor to the United States. You are told that the economy is significantly below its potential output and that the following will happen next year: World income will fall significantly due to the pandemic, and the price of oil will fall significantly due to lack of economic activities, as well as the availability of alternative and more sustainable energy sources (wind, solar, hydro, nuclear), and the U.S. is an oil exporter, along with shale and natural gas.

a) What kind of policies (under Fiscal policy) might you suggest to the government? Mention three.

b) Consider the economic principle held by Classical economists: The economy always returns to its potential in the long run. What are Keynes’s criticisms of this economic principle?

Answer 1

a)

The Small and Medium enterprises, the poor and the health sector had hit hard by the pandemic. Below are the fiscal measures that I would recommend to Federal Government to take:

- A stimulus package to small and medium enterprises for their revival.

- Providing unemployment insurance for the people who have lost their current jobs due to the disease.

- Higher government spending in the health sector, investment in building new COVID specialized hospitals, increasing number of beds and expenditure to be incorrect on the imports of Ventilators

- A stimulus package for providing food safety nets for the vulnerable. Direct cash transfer in their bank account would be preferable for immediate help

- Expenditure to be incurred on conducting rapid testing and contact tracing. This is the only way to fight against this pandemic

b)

The Economic Principle: Economy always come back to its potential level had been criticized by the Keynes. He argued that there are several bottlenecks such as wage and price rigidities due to which Output do not come back to its full potential level. There is always underemployment in the economy and it has to settle down below the full potential output.