For the second time in a week, the Bank of England has cut interest rates in an attempt to rescue the UK economy from the jaws of a coronavirus induced crash.
In an unprecedented move, the monetary policy committee has announced a reduction in the interest rate from 0.25% to 0.1%, the lowest ever recorded in history! In addition to this move, they have also announced a further round of quantitative easing, with the central bank planning to inject a further £200 billion into the economy.
If there is one thing that really demonstrates the severity of the economic crisis we are now facing, it is the extraordinary measures being taken by central banks around the world.
In the last month we have seen examples of almost every type of monetary and fiscal policy which governments and central banks have at their disposable.
When the novel coronavirus, officially named Covid-19, first appeared in China three months ago, the People’s Bank of China quickly announced emergency measures to free up capital for banks to loan small and medium sized businesses. We then saw the creative use of fiscal policy in Hong Kong, with the local government promising to give cash handouts of HK$10,000 to every adult over the age of 18 – a policy that the US looks soon to adopt as well.
In the US and UK, monetary policy has been the favoured approach for dealing with the crisis, with the central banks in both countries reducing interest rates, announcing huge new waves of quantitative easing, and reducing the reserve requirement ratio for commercial banks.
Whilst economic policy makers around the world have been incredibly proactive, the major concern we all face is the limited affect it seems to be having: the stock markets are still in freefall, businesses are empty as the world goes into lockdown, and record numbers of people are declaring themselves as unemployed.
As students of economics, the best we can do in these uncertain times is keep ourselves safe by staying at home, following the advice of our governments, and using these crazy times to see all of that economic theory you have been learning materialise in front of your eyes!
THINK LIKE AN ECONOMIST!
Q1. Explain one type of fiscal policy mentioned in the article.
Q2. Explain one type of monetary policy mentioned in the article.
Q3. Evaluate the impact that measures taken so far by governments around the world are likely to have on their domestic economies.
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