Question

Our “new normal” (at least for the moment) in the face of growing COVID-19 pandemic fears includes physical distancing, online schools, limited activities for “non-essential” businesses, and restrictions for large group gatherings.

What do you think will happen to unemployment, inflation, and GDP based on these government policies?

Please explain why you believe these things will happen – don’t just say, “it’ll go up/down.”

Answer 1

SOLUTION:-

* COVID19 has induced a supply recession and unlike the 2008 recession, this is a crisis based on human behavior and choices. If we take US the growth in the first quarter of 2020 went into a negative of 5% and around 33 million had filed for unemployment benefits. The second quarter was, even more,, devastating with 50 million fillings for unemployment benefits and GDP falling to a -31%. with an increase in unemployment and pay cuts in major sector the demand and purchasing power have fallen drastically. The Us oil market was flourishing but the pandemic induced shock led to a collapse of the oil prices pushing down the price to $24 a barrel and the global oil demand is estimated to fall by around 10%. The closure of trade, firms, restauranta led to a stop in fish farming and also seafood operations. 2/3rd of US salmon is exported out of which 1/3rd is to china and due to the closure of trade the export revenue of seafood has declined(x).

* Therefore to rebuild the economy from the recession the government introduced the CARES Act through which 600 is being provided to the unemployed over and above the state unemployment benefits along with other fiscal and monetary policies. The extra payment of $600 would definitely help the unemployed, self-employed, and gig workers but will it reduce teh unemployment rate or induce economic growth is the big question. Economists have criticized this policy as a disincentive policy as it would encourage people to stay unemployed as some are earning more than their regular income. The increase of cash in hand increases purchasing power hence stimulus to the economy and a boost to the GDP (C+I+G+NX) based on past research on recessions. whereas the current recession is not due to demand factors but majorly due to supply-side factors (closure of firms, restaurants, organization, and trade). Consumers are assumed not to be spending due to financial constrain but it is also due to the fact that they are unable to do financial constrain but it is also due to the fact that they are unable to do so due to lockdown and quarantine policies hence hampering the consumption component of the GDP. Therefore, the package will stimulate the aggregate demand and may decrease unemployment but the magnitude of the impact is temporary and small.

* The introduction of money in the financial system has raised questions on inflation but studies on the bank's past balance sheet indicate that expansion policy may not create the inflationone is aiming for the economy. According to Blanchard from PIIE, high unemployment is related to low inflation (Philips Curve) and even with the stimulus and policies reduction in unemployment rate is questionable due to the weak wage push. The economy is having not only a fall in demand dor goods but oil price and trade which has given rise to another problem of deflation rather than inflation. The economies due to past experience know how to deal with a fall in demand but the current situation is a fall in supply. Hence the long term impact of COVID on the economies and unemployment will depend on the polices implemented and regulations during the phase opening up of economies.

THANK YOU

  

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