The natural rate of interest will be 5% in the absence of the financial crisis. The economic crunch is a result of the recession of run off the mill. Occasionally, the commercial interests’ rates entirely give strength to the economy and support it. In such an economy, there is maximum productivity and employment. On the other hand, inflation is kept at a constant rate. Primarily, the recession that results from run off the mill is a failure in business, which occurs concurrently with the plans of investment. The primary cause of this recession is the outbreak of the global pandemic that id the Covid-19. It has pushed the economy to the shocks of vulnerability (Cukierman, 2017). Typically, the federal reserve’s serves to conduct a policy that is nationwide in terms of money through the management of interests that are short-termed. Straightforwardly, the system concerned with money influences the interest rates a great deal.
On the other hand, there is an indirect impact on the prices of stock, the exchange rates of currencies, and even wealth. Moreover, other significant implication includes effects on productivity, various investments, inflation, and also employment. The global outbreak of the coronavirus has triggered the cessation of most economic activities worldwide. The recession that is occurring worldwide is, therefore, inevitable. If there is no immediate action, there will be a significant state of depression. The policy makes, consequently, ought to take action before things get worst (Redbird, & Grusky, 2016). In the wake of the tremendous crisis, the monetary and the fiscal policy formulators globally will have no option apart from withdrawing all kinds of stops to avoid the apparent recession during this time. This kind of recession may automatically lead to depression.
Moreover, to facilitate a fiscal policy that is more expansionary, major banks will have to make sure that there is a continuity of credit from households and even companies. In the event that the gains on a stock that are expected begin to rise, there is a probability that there will be no change in the expected returns. This, therefore, implies that the demand curve will have to shift towards the left side. Generally, there will be a Signiant fall in the equilibrium rates of interest. It is clear that the monetary policy, otherwise or conventional, automatically loses is strength at the bound that is lower than zero. There is no way that the system on financial terms cannot have the capacity to ease the stability of the economy if there is no fiscal easing. This is a clear implication; therefore, the government will have to spend more or lower the taxes. The reduction in interest rates is never a good idea. Primarily, those people that survive on the incomes that are fixed will be having a difficult time trying to meet their basic needs. Most of them are not in a position to make a return of their money without incurring extreme risks. The federal government may have no to very little ammunition in the scenario that the economy ultimately falls to the recession. However, the reduction of the interest rates, option B, in this case, can make borrowing more comfortable and thus an increment in the investments and outputs. The increased production, therefore, will, in turn, lead to employment opportunities. There is a high possibility that the fiscal policy can altogether remove the gap of recession and allow the economy to resume its normalcy. The unconventional monetary value has yielded high power in several rates of interest, thus aiding in the revival of the economy.
Even though the coronavirus pandemic shall come to pass, the general in life as it was initially may not be realized. There will be implications on the social and economic lives. There will be shits that will be very painful economically (Hafiz et al.,2020). A zero Fed rate does not imply that the consumers will have to incur any borrowing cost. Primarily, most banks need to make profits to be sustained. However, the monthly interest will be very low for them and thus low marginal benefits. In essence, each country is comprised of output, which, to a greater extent, is influenced by capital, technology, and Labour, which are the significant factors of production. For instance, an increase in labor will automatically imply an increment in the output. Similar to the rise in the capital.
Reference
Cukierman, A. (2017). Money growth and inflation: Policy lessons from a comparison of the US since 2008 with hyperinflation Germany in the 1920s. Economics Letters, 154, 109-112.
Redbird, B., & Grusky, D. B. (2016). Distributional effects of the great recession: Where has all the sociology gone?. Annual Review of Sociology, 42, 185-215.
Hafiz, H., Oei, S. Y., Ring, D. M., & Shnitser, N. (2020). Regulating in Pandemic: Evaluating Economic and Financial Policy Responses to the Coronavirus Crisis. Boston College Law School Legal Studies Research Paper, (527).