Explain using suitable examples how covid_19 has changed the risks dynamics of the global economy and give the lessons learnt for the banking sector( 10 marks)
At the time of the COVID-19 pandemic, countries all over the world are facing a situation of recession due to the crisis. The unemployment level is high, GDP is falling and economic growth is slow.
Recession can be controlled by the expansionary fiscal and monetary policy. In this, the government spendings and money supply in the economy are raised by govt. That stimulates economic activity and results in growth.
Fiscal policy is a general tool for trade cycle management. In this tool, the policymakers, in recession conditions stimulate aggregate demand and unemployment and in inflation situation constrain it.
The Central bank opts for an expansionary monetary policy. Under this policy money supply in the economy increases.
Central banks can do open market trading where they buy and sell treasury and securities. Buying securities helps the central bank increase money in the system and raise the money supply in the economy.
The central bank can also influence the money supply in the economy by making changes in the reserve rate. The Reserve rate is a deposit rate that commercial banks have to keep with the central bank. If the central bank wants to raise the money supply in the market it keeps the reserved rate low, this results in a decrease in interest rate.
An increase in money supply rise the investment and a rise in investment helps in increasing aggregate demand and generating employment opportunities. It raises the GDP of the economy.