Question

The policy tracker page in the IMF website summarizes the key discretionary fiscal and monetary policies that governments are taking to tackle the economic impacts of the COVID-19 pandemic. Consider the following examples.

(a) The People’s Bank of China (PBOC), China’s central bank, has lowered its required reserve ratio for commercial banks by 50 – 100 basis points (one basis point = 0.01%). Discuss how this policy would affect the money market. Using the AD-AS diagram to explain the impact of impact of the policy. (10%)

(b) In U.S., an estimated of US$2.3 trillion (around 11% of GDP) of Coronavirus Aid, Relief and Economy Security Act (“CARES Act”) was passed. It includes tax rebates to individuals, expanding unemployment benefits, and so on. Use the AD-AS diagram to explain the impact of impact of the policy. (10%)

(c) Many governments have adopted policies to help firms and business to avoid bankruptcies and lay-offs, such as offering relief on tax and wage costs and funding banks to lend to firms that are suffering. The main purpose is to avoid the potentially temporary negative supply shocks to become permanent. Discuss why it is important to keep the negative supply shocks temporary. (10%)

Answer 1

Negative supply shock that has been created adversely effect the price and unemployment. In a temporary or short run this can lead to increase in prices of goods and services but in long rung this will lead to cut in cost of production which impacts the employees as there will layoffs to curb the cost. This situation will lead to increase unemployment with is not a good situation for an economy. This is one of the major reason why Governments are providing stimulus to avoid this situation to become permanent.

answered by: anonymous