Answer to Question #234735 in Macroeconomics for Soma

Question

a. COVID-19 all around the world has restricted the economic activity. To stop the spread of the virus many other countries including Pakistan adopted the policy of smart lockdown. Shutting down of the industry has created adverse supply shock in the economy. While, the slowdown in business and economic activities the country is in the recessionary phase of the business cycle as the GDP growth for the FY 2021-22 is expected to be -1 percent accompanied by high unemployment and poverty rate.

I. Reflecting on the above situation justify whether the State Bank of Pakistan should opt for expansionary or contractionary monetary policy as a stabilization policy. Also illustrate it graphically.

Answer 1

In this case, State Bank of Pakistan should focus on expansionary monetary policy through reduction of interest rates. Commonly, COVID-19 has reduced the income of both the companies and the customers. Therefore, raising interest rates will not be beneficial since only few people will maintain respective standards. Therefore, lowering the interest rates will encourage customers to spend more, thus generating more revenue and income for stability.