Answer to Question #240201 in Macroeconomics for Zama

Question

Given the nature and effects of covid 19 on employment, output and Inflation, how should policy makers respond to covid 19?

Answer 1

Solution:

Covid 19 has led to devastating effects on the economy as a whole. It has resulted in an increased rate of unemployment, a decline in output, a reduction in GDP, and high inflation. This has forced policymakers to respond with various policies in order to save the economy and reduce the adverse effects of covid 19.

These policies include the following:

1.). Fiscal policies – This includes policies such as stimulus packages to support consumption and investment, expansionary fiscal policy tools such as increased government spending and reduction in taxes will stimulate aggregate demand, leading to a higher output, increased employment, and a higher price level.

 

2.). Monetary policies – This includes the use of expansionary monetary policies that increase the rate of monetary expansion to stimulate the economy. The central bank can decrease the discount rate, purchase government securities and reduce the reserve ratio with the aim of expanding the supply of currency or increasing money supply for the country. This will lower interest rates and borrowing costs, with the aim of boosting consumption and investment.