Question

In the midst of COVID-19, it is reported that over 195 million people will lose their jobs and many small businesses have already closed around the world as a result. Central Banks across the world have been advised to institute policies to help stabilize their economies. Discuss whether central banks should implement expansionary or contractionary monetary policies to achieve stabilization. Discuss arguments for and against each policy direction. Discuss tools that can be used.

Answer 1

Now, in the recent times the economy is going through a tough period where there has been a slow down in the economy. So, the Central banks need to follow a expansionary policy which can revive the economy.

As a part of the expansionary monetary policies, the government shall increase the money supply in the economy to boost the aggregate demand. I am for the expansioanry policies.

If we go for contractioanry policies,this would further lower down the supply of money and would lead thee conmy towards deep recessionary trends.

It would do so by lowering the reserve requirement of the banks. This would increase the money supply as less funds are tied up with the reserve requirement of the banks. This would pump momey into the system and would help stabilize the economy.

Lowering the federal discount rate. They would lower down the rate at which the banks borrow from the Federal bank.

They can also purchase open market securities.By the purchase of open market securities, they would increase the money supply.

As a result of the expansionary fiscal policies, the central government shall cut tax rates and also increase the government spending. These measures shall increase the aggregare demand of the comsumers.