Macroeconomics
Present and explain plenty the possible consequences of COVID-19 pandemic on:
a) The component of aggregate expenditures:
- Consumption (10 points)
- Investment (10 points)
- Government Expenditures (10 points)
- Net Exports (10 points)
b) The aggregate Supply (20 points)
c) The Fiscal Policy (20 points)
d) The Monetary Policy (20 points)
Structuring the analysis of the consequences, please select a specific country.
Use AD-AS and money market diagrams to support your statements. Indicate (draw the shifts) and explain changes:
Country: United States of America (USA)
a) Aggregate expenditures
· Consumption is going to decrease in the short term, principally because people will tend to save money, most of the people are just buying things of the “basic basket”, this applies more for people who are not paying their salary or unemployed people, government will try to encourage the consume in the long term with loans at very low interest rate, more credit availability. In USA, the president D.Trump is giving to people bank check to help people and promote the consumption.
· Investment is going to decrease in short and long term, this situation is totally new and the economy is getting into unknown territory, this causes that the investors will be
afraid to invest because they´ll not get any revenue, including private and public institutions. People will tend to save money. In USA, the most famous investors stopped to invest their money in airlines, because that companies are the most affected in this situation and they´re losing money.
· Government expenditures will increase because it´s the only one who can maintain the economy sustainable. Health sector will be the priority during this period of the virus, then will be the invest expenditures, and finally they´ll try to cover the public debt. In USA government is expending a lot of money to maintain the economy, they´re giving loans to all banks, they´re increasing the manufactory of health and sanitary products.
· Net exports will decrease in short term because all factories stopped their labours, except essential factories, for the ones who produce health and sanitary products and some others. If one country have more demand than offer, other country help it to cover that demand, but if we talk about products who came from the factories closed, it will be low exports until factories open again, this will occur in the long term. Also, adding the high risk to transmit the virus, frontiers are closed, and the import/exports stopped. The famous company of USA “Chiquita” stopped to export their product around the world because of the actual situation.
b) We are in times of recession, almost close to a depression, this means high rate of unemployment, we can see it clearly in USA (4.4% of unemployment rate), causing the aggregate supply fall. The Aggregate supply curve its slopping upward in the short run because prices are increasing, specially products of the basic basket, health/sanitary products and some services (ex. Internet) because the demand is more than the offer, can be explained because factories are closed and they´re not producing anymore, until quarantine ends, but if we talk about other kind of products or services the demand is too low, so prices will decrease and the production will also decrease for that kind of products/services. Most of the companies are getting low profit because of this situation and it will affect in the long term. If we take the example of the shock in oil price, we can see that it caused a lot of unemployment, bankruptcy in some American oil companies because the cost of production and extraction of the petroleum is too much higher than the price of the petroleum barrel, so it´s not profitable.
c) About fiscal Policy, government will try to apply an expansive fiscal policy, to encourage the consumption and cash flow. The increase in government expenditures will help to the expansive fiscal policy, if they also reduce taxes it will be useful, but the government expenditure is too high and they take that money from taxes, so it will be difficult to reduce taxes in short term. If the government increase spends or decrease taxes, the curve goes to the right, interest rate increase because salaries increase, increasing consumption and money demand, this makes interest rate goes up, decreasing investment.
d) About the monetary policy, the central bank is decreasing the interest rate in order to increase the quantity of money in the economy, creating liquidity, so the banks will be able to ask for more money reserves, and then give more loans to people and companies. Also, the central
bank can decrease the level of reserves required for banks so they can use that part of the reserves to generate more money and increase the offer of money in the economy. The most important thing that the central bank is doing during this period is buying “toxic debt” that means debt who will not be paid and its not really relevant, in order to create liquidity and cash flow.
Total: 1351 words
References:
Beatriz Navarro, 2020, “The anti-crisis checks that millions of families in the US will receive will be named after Trump”, La Vanguardia, 04/05/2020, https://www.lavanguardia.com/internacional/20200416/48549785646/cheques-anticrisis-donald-trump-recibiran-eeuu.html
Anneken Tappe, Tami Luhby, 2020, “Nearly 22 million Americans have applied for unemployment financial aid in the past 4 weeks”, CNN USA, 04/05/2020, https://cnnespanol.cnn.com/2020/04/16/cerca-de-22-millones-de-estadounidenses-han-pedido-asistencia-economica-por-desempleo-en-las-ultimas-4-semanas/#0
Javiera Donoso, 2020 “mayday,mayday,mayday: airlines stocks goes underground before the mythical Warren Buffet turn his back to that sector” Diario Financiero, 04/05/2020, https://www.df.cl/noticias/mercados/bolsa-monedas/mayday-mayday-mayday-acciones-de-aerolineas-se-van-a-tierra-luego/2020-05-04/095354.html
Anonymous, 2014, “Born the biggest banana´s company of the world”,BBC, 04/05/2020, https://www.bbc.com/mundo/noticias/2014/03/140310_economia_mayor_bananera_mundo_ar
