Question

How can a country get out of the economic crisis faster after COVID-19 corona virus pandemic? What economic policies should be applied?

Answer 1

Ans. Due to coronavirus, the consumer spending and investment has decreased causing aggregate demand to fall and also, due to lockdowns and disruption of supply chain, aggregate supply has also decreased. The combine affect of these two is decrease in output from full employment level, Y to Y’.

Government should use an expansionary fiscal policy and monetary expansion should be used alongwith so that aggregate demand increases and output level gets back to full employment level, Y. The rationale behind using both the policies is that only fiscal expansion will increase real interest rate in the economy increasing cost of borrowing and reducing provate investment. This will decrease some part of aggregate demand which was increased by fiscal expansion. So, a monetary expansion will keep the interest rate low so that fiscal expansion h full effect on output and there is no drag due to decrease in investment (called crowding out effect).

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