How to effectively deal with macroeconomic impacts of COVID-19 pandemic, a

discussion on expansionary fiscal policy

This article is about the United States’ planned recovery process from Covid-19. An aid

package was released by President Biden and his transition team and the aim of this

package was to accelerate vaccination, other health programs, and testing efforts with a

$350bn budget for each state and local governments, as well as $1tn in relief to families, via

direct payments and unemployment insurance. (Singh) The government's plan to use

government spending and taxation to stimulate the macroeconomic conditions of demand,

inflation, unemployment, and economic growth is referred to as fiscal policy. The COVID-19

pandemic has resulted in economic shocks on both the demand and supply sides. This

condition has pushed the economy into a recession. Recessions are defined as periods of

temporary drawbacks in economic activity most generally due to a widespread decline in

spending. The graphical illustrations below represent existing recessionary economic state

of the USA and the impact of the stimulus package as follows; (157 words)

Graphs
The graphical illustrations above, Figure 1 and Figure 2 represent the macroeconomic state

of the USA and the Phillips curve in the USA market respectively. The COVID-19 pandemic

has significantly brought the USA’s economy into a recession. The current short-run

positioning of the economy is represented at the intersection of AD1 and SRAS. Due to the

recessionary gap, the price levels have dropped down and the unemployment rates have

increased significantly. To support the economy the 1.9 trillion USD relief package will boost

the consumption and government spendings to support the C and G of AD=C+I+G+NX

where AD1 will shift to AD2 and bring the economy into long-run equilibrium. With the

potential shift in AD, the price levels are expected to increase, rGDP increase and the

unemployment will decrease. Figure 2 represents the existing state of inflation and

unemployment with a Phillips curve. In the existing state economy, the position of the

recessionary gap has been represented with point X. The expansionary fiscal policy will

boost spending, and due to higher demand the unemployment will decrease and inflation will

increase. This will cause movement from point X to point E where LRPC and SRPC intersect

and full employment is obtained. (205 Words)

To fix the problem of the recessionary gap, the government of the USA’s tendency is to

adopt an expansionary fiscal policy. The main purpose of this policy is to boost economic

activity and overall spending and bring the economy back to its long-run equilibrium.

However, this policy could lead to an increase in the real interest rates with increased

demand for loanable funds by the governmental bond issuing. When the interest rates rise,

overall investments are negatively affected. In this case, the investors will be more hesitant

to invest in any industry, therefore the investment and spending rates will decrease. Such a

case could cause a decline in the economic growth potentials. To reduce the burden of rising

interest rates a supportive solution is to implement an expansionary monetary policy. The

increased money supply would cause a fall in the interest rates and further support

investments and consumption. With the support of the US central bank, the impact of

expansionary fiscal policy could further be strengthened and the macroeconomic equilibrium

could be reached with a healthier methodology. (177 Words)

In the existing state of the USA’s macroeconomic outlook, the recessionary gap holds an

important positioning. To resolve and heal the devastating impacts of the recessionary gap it
is certain that an expansionary policy is a necessity. In such an aim the US government

plans to implement an expansionary fiscal policy by cutting down taxes and boosting

governmental spending. Although this would support aggregate spending, the policy holds a

risk of crowding out due to the increased interest rates. At this point, it is almost certain that

the supportive solution of the central bank with an expansionary policy should also be

implemented. With such a combination, the scars on US households and businesses could

be restored. However, this combination could result in high inflation due to strong positioning

in aggregate demand. In conclusion, although there are macroeconomic pressures of

inflation, to eliminate or reduce the negative impact of the pandemic process, expansionary

fiscal and monetary policies should be implemented. (159 Words)

Appendix

Bibliography
Singh, Maanvi. “'No time to waste': Biden unveils $1.9tn coronavirus stimulus

package.” The Guardian, 15 01 2021,

https://www.theguardian.com/us-news/2021/jan/14/joe-biden-coronavirus-stimulus-

package.