Question

The timing and the amount of the second stimulus check are still undetermined. In your opinion, is the stimulus check a must to bail out the economy from the current downturn by COVID-19 pandemic? What will be the impact of the stimulus checks on the unemployment rate? Please state your answer in the language of economics and indicate which macroeconomic model (classical, Keynesian, monetarist, or rational expectation) to support your answer.  

Answer 1

The Corona Virus Pandemic has hit the United States economy in the worst possible way and manner, wherein the aggregate demand for goods and services remains on the lower side as people remain indoors and their incentive to move outside their houses is limited and on the other hand, establishments also are told to stay shut to avoid spreading the disease which in turn is reflecting upon their cost of operations as well as increasing unemployment in the country.

As one of the policy measures, the government of the United States has moved towards reducing the impact by providing a grant to people which is to the tune of 1200$ so as to be able to support themselves financially during this time. These types of payments are referred to as transfer payments, wherein the government supports people without expecting any returns from them directly.

As people have additional cash available with them, this is regarded as the biggest method of reducing recession as people then demand more in the economy and the aggregate demand goes upwards. As this happens, suppliers maintain their production levels and the price at which goods and services are delivered do not fall but rather return back to its normal state or position.

As people demand more, the supplier’s incentive to produce more increases. For example, if a person had 1000$ to spend per year on all items that he needed, an addition of 1200$ would mean that his purchasing power would increase substantially and help in producers to produce more goods and services as an overall market. This increases the Gross Domestic Product of the country as the total value of the final goods and services being traded in the market increases. Further, as companies try and increase production, they need additional work force which helps in reduction of unemployment in the country as well.

Thus, we can conclude by saying, that the government’s policy of giving people direct money in their accounts would allow for aggregate demand for goods and services to increase, which in turn will help both producers as well as those that work for the producers and helps largely in bringing back the economy to its previous state.

This model is also known as monetarist economic model, which advocates for government to intervene in the markets as and when a severe problem of recession takes place in the economy. The classical and Keynesian models move around the markets being able to correct the effects of a recession by themselves through the forces of demand and supply wherein producers would increase production themselves. These are thus not correct in context with the expansion activities which have been indicated in the case study.

Further, rational expectation is based on how consumers react to the market place and does not go into government intervention but only focuses on what a rational consumer is likely to behave in the economy.

Thus, we can finally conclude by saying, that the government is following a monetarist economic theory, wherein they are directly providing cash to those living below a certain threshold with the view of increasing aggregate demand and supply and correcting the economy using that strategy respectively.

Please feel free to ask your doubts in the comments section if any.