Question

The US economy has shrunk 5% due to the impact of the Covid19 pandemic. President Trump has passed a piece of legislation that allows for 5 Trillion dollars to be put back into the economy, through near-zero interest loans for business, and payments of nearly $2,000 for the population. How do you think people will use their $2,000 payment, and why. How do you think industry will use their much larger payments, and why. Comment on short term, and long term application.

Answer 1

In the given scenario, the consumers will use $2000 payment, to cater their needs of essential goods and services. It is due to the reason that demand for essential goods and services is relatively inelastic in nature. The most part of this income,  will be used in the short run to cater their urgent requirements. People who have lost their jobs, may invest some part of this payment upon skill enhancements and learn new skills as well as make investments to find a new job. These spending and or utilization of money is done with the long run orientation.

With respect to the industry and firms, most of the benefits via pumping of money  is used with the long run orientation. It is the restructuring of the organization of the industries and firms due to the after effects of COVID-19, and investments in capital with borrowings at the rate of near zero interest rates. It is done by the industry to make them ready to sustain after the crisis and remain operational in the long run. In the short run perspective, the firms and industry will utilize the benefit to acquire working capital for day to day operations of the business, building ability to pay for expenses and performing marketing activities. It will help them, cater the demand that can accelerate after the period of COVID-19 crisis.