The Federal Reserve’s response to COVID-19 (2/4)

The FED implemented new schemes of fiscal policy to ensure that the US economy would endure the impacts of the pandemic. Fiscal policy involves amendments to taxation or government spending which can influence aggregate demand.

Expansionary fiscal policy was adopted to diminish the impact of the dip in the US economy. The Bureau of Economic Analysis calculated that the US experienced the steepest drop in economic output on record during the second quarter of 2020. Biden has committed to a mammoth $1.9 trillion stimulus package to reignite the economy, this figure amounts to 8.8% of the total US GDP. This package takes measures to address unemployment and the minimum wage.

Unemployment benefits increased by 33% (from $300 to $400), under the Pandemic Emergency Unemployment Compensation Program.In March 2020, unemployment was at 4.5% but by April this increased to 15%. Unemployment has many negative impacts on the economy. One effect is that the government will receive less tax revenue. Furthermore, it indicates that the economy is operating below its maximum capacity. Finally, a rise in unemployment usually coincides with a negative multiplier effect.

All these impacts are unwanted as they inhibit economic growth which is reflective of the performance of an economy. Undoubtedly, these schemes have alleviated the potential problems that the economy would face. Unemployment has steadily fallen since the peak in April and currently sits at 6.2%. The stimulus package, which was implemented to revive the economy with a huge injection of government spending, has enabled more money to circulate in the circular flow of income.

This influx of money stimulates growth through an increase in aggregate demand. This concept refers to the size in which an injection can lead to a larger increase in Real GDP through spending. Currently, the multiplier is low due to high unemployment therefore this may boost the economy as much as previously expected. This injection has been effective in reducing unemployment, whilst acting as a catalyst for growth indicating that the FED has been effective in mitigating the impact of COVID-19 on the US economy.