Question

The Federal Reserve has taken unprecedented actions to save the economy during the coronavirus crisis. There have been rate cuts and a slew of credit and lending programs that could inject more than $6 trillion into the economy. Congress has passed $2 trillion in rescue efforts but continues to squabble over how much more should be allocated and how it should be distributed. President Donald Trump has ceased his consistent criticism of the central bank. On Thursday, April 9, the market learned that the economy was even worse than most had thought, as the Labor Department reported that another 6.6 million Americans had joined the ranks of the jobless. That meant that in just a three-week period, more than 16 million Americans, or 10% of the workforce had been sent to the unemployment line. The programs were far and away bigger than anything the central bank attempted during the financial crisis, and were announced in much less time than the 2008-09 efforts. [CNBC, April 13, 2020].

Covid-19 has distressed economies individuals, businesses and policy makers they are forced to make tough choices. For the American economy Congress passes $2 trillion support to the economy (fiscal policy) and Fed in injecting trillions as well. What do you think under such crisis a mix of fiscal and monetary policy is better policy of one policy focus may produce better results?

Answer 1

Mix of both fiscal and monetary policy is best suited for crisis response in substantial manner to bring required changes in aggregate demand and real GDP.

Since oil prices go negative, the US wTi crude oil prices remain unattractive as storage costs get higher and supply remains higher because oil plants cannot be closed and thus US economy receives almost zero prices on selling in short run and economic growth deepdives as unemployment toonrises because of low revenues and low forex reserves.

Coronavirus has had huge impact on economic growth due to lockdown and shutdowns and social welfare losses.

The economic growth remains subdued as Aggregate demand and consumption both fall simultaneously also leading to fall in prices and inflation.

Investment is pumped out due to falling interest rate regime and lower economic outlook of companies.

Government spending is ramped up due to an expansionary fiscal policy by reducing taxes and spending. Also net exports go negative as imports surge due to supply shocks.

Negative growth in GDP causes high unemployment and lower inflation based on Philips curve movement.

Thus in short run, aggregate supply is high but aggregate demand is low and real GDP falls. However in long run the economy stabilises.

The US has been great in fiscal stimulus of 484 billion dollars and US Fed unlimited bonds buying programmes worth 2 trillion dollars with rate cuts, CRR and SLR and liquidity coverage ratio cuts. Triggering automotic stabilizers and combined above policy will help alleviates financial distress and grow economic growth throufh higher consumption and disposable incomes.

The supplyvof credit availability rises causing its demand to go down considerably.

Sijce the interest rates are cut, the banks shall transmit easier loans availability at lower rates and thus loan markets will grow enormously.

However the cases has risen to 1 million approximately and states have been relaxed and thus caused havoc.

To avert this crisis, US must impose lockdown and gradually open economy using partial lockdown only after 2 months of complete lockdown. Major boost towards creating vaccination and healthcare for curing patients is required

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