Question

Given the actions undertaken by the federal government to counteract the impact of the COVID-19 on the economy

a) What type of gap is the lockdown causing for the US economy? What is the effect on real GDP, unemployment and price level. Draw the gap in the AD/AS or TE/TP model (be sure to label everything properly).

b) What type of fiscal policy did Congress implement? What method did they use? Draw the fiscal policy using the graph you chose in a).

c) What type of monetary policy did the Fed implement? What open market method did they use? Draw the monetary policy using the graph you chose in a).

d) What effects will this fiscal policy have on the federal budget and how will this impact the national debt? How will it affect the loanable funds market and what will be the effect on interest rates?

Answer 1

a) US economy will face a recessionary gap because of COVID-19. The real GDP decrease and unemployment will increase and price level also decreases .

b) The congress can take a expansionary fiscal policy to increase the money supply in the economy and increase the aggregate demand .the method they can use increase its government purchases or government spending ,and lowering tax rates .

WIth expansionary fiscal policy, the AD curve will again shift to the right to the AD and the economy will reach its potential level of ouptut or full employment level.

c) The FED can implement expansionary monetary policy . and Fed can use the open market purchases to increase the money supply and fill the recessionary gap.

d) Fiscal policy will have the negative impact on federal budget and national debt will increase as the economy will have to borrow from world bank to increase the spending in the economy. The loanable funds market , the supply of loanable funds will increase and will decrease the interest rate .