In: Economics
It is estimated that the recent global outbreak of Covid-19 has caused a downturn in global GDP by 2-3%.
2.Suppose the Canadian government wants to use Fiscal policy to stabilize the economy during the time of this outbreak.
3. What actions should it take in terms of In terms of Monetary Policy? Discuss how this policy work.
4. Include graphs of the Monetary policy
1. The given equation is
Y=C+I+G+X-M
where C=consumption, I=investment, G=government spending, X=exports, M=imports.
Now that we have described the variables, its pretty easy why
the global downturn if happening. Due to the lockdowns, many
outlets are closed. This includes restaurants, malls, cinema halls,
most regular shops, e-commerce and more. This massively affects
consumption. Consumption, C, has decreased by massive
amounts.
Then there is investment. As consumption goes down and returns
become lower or negative, there is no sense in investing. As people
and corporations become pessimistic, they invest lower too.
Government spending is actually higher, as governments world over
combat the virus and invest in medical facilities, emergency
services, medicines, basic necessity services etc.
X-M is irrelevant in the world perspective as its net zero. When a
country is importing, another is exporting the exact amount and
hence X-M is zero for the world.
2. While question 2 isnt really asking anything, i assume its saying how government can expansionary fiscal policy to fight the downturn. Government can use fiscal policy in two ways- it can increase its own spending, G, and/or lower taxes to increase consumption. Increase in both will increase GDP, as can be seen from the equation.
3. An expansionary policy also increases GDP, but in slightly different way.
Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates. It is enacted by central banks and comes about through open market operations, reserve requirements, and setting interest rates. The central bank can reduce the required reserve ratio (thus increasing available funds for lending), by lowering the benchmark discount rate or by open market operations (buying treasury bonds in the open market).
This is shown in the graph below