The Senator of USA launched th
The Senator of USAlaunched the COVID-19 business alleviation program in collaborationwith the Small Scale Business, Trade Associations, and someselected banks. Under the program, tthe senator is giving fundswithout interest to selected financial institutions for onwardlending to businesses at a 3% interest. The program is aimed athelping beneficiaries to sustain their businesses during theCovid-19 pandemic. Use this information to answer the followingquestions.
- Explain in your own words, the monetary policy tool being usedby the senator under this program.
- If the Senator had pegged the interest rate under the programat the monetary policy rate, will this have been a better way ofsetting the rate? Explain the advantages and disadvantages of eachscenario.
- Explain the expected impact of the low-interest rate program ongross domestic product (GDP), articulating the possiblepathways.
Answer:
a) Senators have decided to provide direct funds to selectedfinancial institutions. so the job of those financial institutionsis to provide small business loans at a 3% interest rate. so thisis coming under direct lending to the bank. This is not a usualtypes of monetary policy as the situation is not favorable so inthis crisis, only this type of monetary policy can be adopted tohelp small businesses.
b) senator has set or pegged the interest rate at the time oflending then it will be more effective than without pegging theadvantage of pegging is there will be uniformity in this process oflending. the disadvantage of not having a pegging can createdisturbances in the accounting process.
c) if there is a low-interest rate in terms of expansionarymonetary policy then a lower interest rate will increase the loanamount and investment will be increased. that will adjust the GDPto maintain a potential level.
Expansionary monetary policy
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