Question

Put yourself in the shoes of the Federal Reserve Chair. What risks and opportunities do you see in the current economy, both long term and short term? What would your monetary policy be and what actions would you anticipate taking over the next year?

Answer 1

            The US economy has been facing various issues in the current era and the covid pandemic has indeed worsened the crisis. The following are the major economic risks that the current US economy has been facing

· Deteriorating infrastructure: Apart from the economic impacts that are caused by the pandemic, the recent report from the American Society of Civil Engineers [ASCE] states that the deteriorating surface transportation infrastructure will cost the US economy more than 8.5 lakh jobs and close to $900 billion loss in the GDP

· Wage stagnation: Under the current economic scenario, there have been huge loss of jobs in the economy and the economic productivity has been reduced to a great extent. This has caused a great reduction in the basic wages of the population.

· Rising income inequality: The income inequality has rose in the US by about 20% from the 1980’s to mid-2010 and the same has been following in the current economy also. The difference in the skills of the labourers has caused the same in the economy of USA

· Elevated pension and medical costs: The pension costs in the economy of US has been rising due to the rise in the number of aged population when compared to the other economies. The ageing population has also caused an increase in the medical costs of the people. The current scenario wherein the spread of pandemic has been prominent, there has been an increase in the medical costs for it which has also caused a rise in the medical costs.

· Large Current account and budget deficits: The increasing imports have resulted in increasing the current account deficits and the decreased revenue to the nation has caused the budgetary deficits to increase in the short run. The covid pandemic has also forced the state to invest a lot in the medical care which has caused the budgetary deficit to increase in the short run.

Considering the above effects on the economy, the following monetary policy actions can be undertaken to make sure that the economy would not fall in to a recession along with the following actions on the economic sectors.

· Since the budgetary deficits and the imports are on the rise, there should be more focus on the domestic manufacturing sector and the domestic means of production has to be given boost in the coming years so as to improve the economic situation of the nation.

· The basic infrastructural units have to be subsidised by the state so that the infrastructural development could be initiated and thus economic benefits could be raised in the economy.

· The medical costs could be reduced by imparting proper medical aids in the initial stages. There should also be dedicated medical aids to the citizens so as to prevent the economy from higher medical costs in the future.

· Income inequality is a major threat to the economy as it would impact in the reduction of labour participation rate in the longer run and hence steps should be taken to increase the income equality in both the public and private domain. Thus, steps like provision of basic income for the poor sections of the society and improving subsidies could help in the same.