COVID Economics #2: Bonds

Last time, we caught you guys up on some of the actions the Federal Reserve has been taking to stimulate the economy during the COVID-19 outbreak.

As you may have heard, the government recently passed a $2 trillion dollar rescue bill, which will help families below certain income requirements in the form of a check mailed directly by the government. More specific details about that here:

Let’s talk about where this boatload of money comes from. There are basically two sources – the people, and the Fed. Why are people still lending to the government in a time like this? Well, according to Alan Blinder, former Vice Chairman of the Federal Reserve and current Princeton professor, the simple answer is that US treasury bonds are the safest asset money can buy. And right now, with all the uncertainty in the market, that sounds really good! The Fed is going to lend the US government as much money as it needs, buying lots of bonds and slashing interest rates to zero. Good thing they can basically create money out of thin air.

Weekly Challenges:

  1. Government spending has obviously increased in these past few weeks. G goes up, Aggregate demand ______, Output ______, demand for loanable funds ______, real interest rate ______, private investment _______, capital stock ______, long-run growth ______ (assuming a perfect AP Macro ceteris paribus world of course).
    Email us your answer for a virtual pat on the back! 🙂
  2. Now for a more open-ended question: how do you see our economy recovering from this? How many months do you think it will take? What do you think is the best-case scenario? Consider the implications of a sudden increase in spending when the lockdown is over, the impact of unemployment, the actions the Fed might take to ease us back, etc. No right or wrong answer — email us your thoughts, we welcome all opinions!

You can just answer one or take on both. From now on, we will be doing a weekly economics update with different types of questions for you all to think about. Stay tuned!

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