Answer to Question #307478 in Macroeconomics for geoffroy

Question

Could you make a list and provide a brief description of some measures adopted by governments (/central banks) worldwide to support economy during Covid-19 pandemy? Explain the logic behind these monetary/fiscal- policy instruments using IS-LM model.

Answer 1

i). Fiscal

Governments signed into law rescue plans which provided relief during the coronavirus pandemic. The plan focused on investing in public health. It extended the unemployment benefits.

ii). Monetary and macro-financial.

Federal funds rates were lowered by the purchase of treasury and agency securities. The cost of discounts was lowered. Federal Reserve also introduced facilities to support the flow of credit.

iii). Exchange rate and balance of payments.

The exchange rate was allowed to adjust with the central bank intervening to limit undue volatility in the market.

Explanation using the  IS-LM model.

Monetary policy has no effect on the IS curve. the expansionary monetary policy will shift the LM curve down. The money supply will increase while the interests rates will fall. Here, the economy is seen to move down along the IS curve. Fall in interests rates rises the demand for investment which has a multiplier effect on consumption.