Question

Right now many economies in the world are experiencing a downturn due to the Corona Virus. a) What kind of fiscal policy can governments use to address the decline? b) What actions will be taken by the government in implementing the fiscal policy that you described in part a? c) What will be the effect on Aggregate Demand (if any) as a result of the actions taken in part b? d) What will be the effect on Aggregate Supply (if any) as a result of the actions taken in part b?

Answer 1

a) Government should enact expansionary fiscal policy.  

b) This policy will raise government spending such as transfer payments to needy people, unemployment benefits etc. and reduce tax rate such that it raise total disposable income with consumers.

c) Rise in disposable income with consumers tends to raise their willngness to pay for goods and raise aggregate demand in the economy.

d) In short run there would not be any chages in aggregate supply because raising production over night is not possible while we can see the change in aggregate supply of goods within the span of one month if there is adequate demand.