Question

It is estimated that the recent global outbreak of Covid-19 has caused a downturn in global GDP by 23%.

Suppose the Canadian government wants to use Fiscal and Monetary policy to stabilize the economy during the time of this outbreak. What actions should it take in terms of Fiscal Policy? In terms of Monetary Policy? Discuss how these policies work; include diagrams in your analysis.

Mention some of the actual measures that have been taken by the Government so far

Answer 1

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Question:

Answer:

COVID-19 Crisis:

COVID-19 crisis a global crisis and most of the nations are facing it. Because of this pandemic situation GDP growth has fallen down sharply. People are dying and millions of people are Corona posItive. People are losing their jobs and companies are going bankrupt or facing the big financial trouble. All the economic and social activities have affected badly. All the affected country are taking many fiscal and monetary action to protect the nation and boost the economic growth.

Monetary and Fiscal Policy During Recession:

The central bank and government follow the expansionary fiscal and monetary policy during the economic crisis or slowdown. through the expansionary monetary policy the central bank increase the money supply in the economy through reducing discounting rate, reserve requirement, buying government securities etc that reduce the interest rate. Lower the interest rate increase the demand of money that increase the aggregate demand in the economy through increasing consumptions and investment. Through the expansionary fiscal policy a government increase the expenditure and cut tax rate that boost the consumption and investment that increase the aggregate demand. A higher AD increase or boost the economic growth.

In a critical situation or economic recession a government and central bank implement it together smartly to provide support to the economy and boost economic growth.

Graph(Fiscal Policy):

In the graph assume economy is at equilibrium at "E0" level now because of expansionary fiscal policy aggregate demand curve (AD curve) shift upward or left and its increased the total output or GDP from "Y0" to "Y1" level and equilibrium point also shift from "E0' to "E1". You can easly understand it through below attached graph.

Graph(Monetary Policy):

Assume current money supply at "LM" level where interest rate is "i" when the government increase the money supply then LM curve shift down ward/right from "LM" to "LM1". its decrease the interest rate and increased the GDP growth from "Y" to "Y1". You can easly understand it through below attached graph.

Monetary and Fiscal Policy in Canada During Recession:

The Canadian government has followed the expansionary fiscal and monetary policy during the COVID-19 crisis. According to the data of the World Bank the Canadian government has provide package of  $171.9 billion (8.1 percent of GDP) in direct aid to households and firms, including wage subsidies, payments to workers.around $85 billion (4.1 percent of GDP) in liquidity support through tax deferrals.

According to the data of the World Bank The central bank of Canada has reducing the overnight policy rate by 150 bps in March (to 0.25 percent), extension of the bond buyback program across all maturities launching the Bankers' Acceptance Purchase Facility etc.

Thank You