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

As to recover from such situation expansionary policy is needed to create demand and increase supply in the economy. Thus creating new job and cycle of income as well as gdp multipier , these type of action are necessary.

Mixed of both poicy is better tool as :

1) it will reduce pressure ilon both financial system and government as they share risk with each other.

2) central bank is increase liquidity in the economy through expansionary policy as well as keep in mind the inflation through policy rate ,while expansionary fiscal also help to increase inflation and demand in the economy by fiscal Accomodative policy. Thus creating more liquidity in the market than single policy use.

3) it is good for sovereign credit rating to share or mix policy uses as it will not increase fiscal deficit much more than single policy use and this is good for attract investment in nearby future.

4) this is also reduce pressure in banking System alone and reduce the possibility of banking system to convert in NPA or insolvent in future as collective effort From government and central bank are necessary in comparison to single handed use of monetary policy.