Question

The economic impact of Coronavirus continues to destroy many economies in the world. Rising unemployment, loss of income and livelihood, loosing and depleting savings, disruption of the supply chain, and losing market for valuable goods and services are some of the important negative impacts on the economy. Many governments were generous by offering income and salaries to unemployed workers, grants for businesses, provision of goods and services, etc. On the other hand, the pandemic is also created new economic opportunities like eCommerce, many made use of historically low oil and stock prices and invested in oil and the stock market. We may more billionaires today than the pre-Coronavirus period. Another positive development was, in many countries the pollution level has gone down and the quality of the environment has improved. Further, people have realized some of the things that they thought were important are no longer important perhaps Maslow’s hierarch of needs on the bottom of the pyramid are the ones that matter most. Kuwait government requested the banks to holds the payments of loans and credit cards to six months and guaranteed salaries for locals in the public and private sectors.

Write a paragraph and use graphs to explain the concept of "Transfer payment (governments giving free money)" in relation to :

Chapter 31 - money growth and inflation - Principals of Economics - Sixth Edition - N. Gregory Mankiw.

Chapter 34 – aggregate demand and aggregate supply - Principals of Economics - Sixth Edition - N. Gregory Mankiw.

Answer 1

Answer: Concept of Transfer payment: Payment received without any good or service provided in return is called transfer payment or transfer income. Examples are Gifts, old age pension, unemployment allowances, scholarships, etc. Being a welfare state, govt. is fully justifies in making expenditure on social welfare schemes in this pandemic situation of COVID-19 like unemployment allowances, loan moratorium, etc. by all this govt. is justifying social responsibility, enhancing business opportunities like eCommerce, liquidity in the markets by curbing interest rates.

Impact of the transfer payment on money growth and inflation:  

1. The coronavirus world is suffering from economic recession in order to curb this situation govt. is trying to increase the money supply in the economy by making fiscal and monetary measures like direct cash transfer in those who are in need of money like migrant laborers, farmers, etc.
2. So by this transfer payment mode govt is increasing money growth in the economy in order to boost consumption, production, etc.
3. Inflation may increase if the cost of production will increase given the public health restrictions
4. prices of essential commodities will soften to maintain sales and reduce inventories.
5. prices of electronics could rise if manufacturing and distribution shutdowns.
6. as energy prices have collapsed it might impact petrol and its related commodities prices.
7. The money growth has a directly proportional relationship with inflation if the currency in circulation increases there is a proportional increase in the prices of goods.
8. This pandemic situation is good for borrowers and lenders as interest rate of banks is low.
9. inflation allows borrowers to pay lenders back with money this is worth less than when it was originally borrowed.
10. It can increase credit which benefits lenders.

Impact of the transfer payment on AD and AS:  

• Increase of transfer payment in the economy like free cash assistance, unemployment allowance, changes in income taxes all this will have a direct impact on consumption, which is the component of Aggregate demand.

AD = C+ I (C= CONSUMPTION, I - INVESTMENT)

• A change in transfer payment will shift the aggregate demand curve.
• govt. fiscal measures will boost the economy
• Aggregate supply is the money value of total output available in the economy for purchase during a given period.
• AS = C+ S
• AS may increase in this pandemic situation as most companies are operating through the e-commerce method and we already know AS can shift if there is technological progress.

Graphical representation: