the risk of the stimulus fiscal policy in the Covid-19

Expert Solution

In COVID 19, though stimulus fiscal policy will help to boost the economy, it may also come with certain risk:

Fiscal policy may take a longer time to implement. And full benefits of stimulus fiscal policy may be analyzed after a decade.
Stimulus fiscal policy may lead to Ricardian equivalence. This means that when government increase its spending, consumers may estimate that future taxes will rise in order to finance government deficits and they may decrease their present spending. Decrease in consumer spending will not increase aggregate demand and hence GDP will not rise.
Stimulus fiscal policy may also lead to crowding out effect. Increase in government spending will decrease private investment. This means that government spending will result in high demand of labor and there will be an increase in wages. Increase in wages will result in loss for the business. As a result private investment will decrease.
In order to implement stimulus fiscal policy, government may borrow from financial markets, this will increase government debt.

Therefore, all these risks are associated with stimulus fiscal policy that are being implemented by many countries in order to fight COVID 19.

Rahul Sunny answered 1 year ago

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the risk of the stimulus fiscal policy in the Covid-19

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