Answer to Question #239371 in Macroeconomics for A.v

Question

Given the nature and effects of Covid 19 on employment ,output and inflation, how should policy makers respond to Covid 19.?

Answer 1

Inflation, unemployment and decreased output are inter related. A policy maker should start from changing the status of decreased output. It means we should provide incentives to producers to produce more in the ways like:-

• decreasing tax rates
• lowering the interest rate or easily availability of credit
• reforming towards ease of doing business
• open economy for FDI etc.

Once the producers will get confidence to increase production level, it will lead to decrease in demand push inflation by increasing supply. They will hire manpower i.e. unemployment rate will decrease. In this process people will have relatively higher purchasing power so they are able to demand more. It is a cycle where all three factors directly or indirectly linked with each other.

But, in case if it is not effectively dealt then low employment level can lead to inflation and inflation will decrease the demand so market will not function well and ultimately production will decrease.