Analysis of Government Policies: COVID-19 Impact on Business Economics

This report provides an in-depth analysis of the Canadian government's economic policies implemented in response to the COVID-19 pandemic. It begins by examining fiscal measures, including increased healthcare spending, transfer payments to households, tax credits, and support for indigenous communities and businesses. The report then explores the Bank of Canada's monetary policy responses, such as mortgage payment relief, interest rate reductions, and asset purchase programs. Furthermore, the report analyzes the roles of households and firms in the product and factor markets. Supply-side policies that boost economic activity are also discussed. The report then delves into the economic rationale behind students' preference for late morning classes and concludes with an examination of automatic stabilizers, their benefits, and potential drawbacks, providing a comprehensive overview of the economic landscape during the pandemic.

Business Economics
Students Name
Institution

COVID -19 Response 1
1.
The Canadian government has implemented a fiscal policy to counter the effects of
COVID-19. Specifically, the government has allocated 0.1 % of the country’s GDP to its health
care system. This is an increase to the health budgetary allocation hence an increased
expenditure. The increased budgetary allocation is meant to help detect, prevent and aid in the
management and treatment of COVID-19 outbreak.
Further, the government has allocated 4.6 % of the GDP to households. This is a form of
transfer payment. This is intended to help employees without sick leave and to act as an
employment insurance (International Monetary Fund, 2020). The transfer payment will increase
the disposable income of Canadians so that they can invest rather than save thus boosting the
Canadian gross domestic product in the long term.
Another notable form of fiscal policy is taxes. Under this new tax policy, Canadians
are subjected to GST tax credits. This tax system is aimed to increase the rate of disposable
income for the Canadian population. This is because tax credits and refunds increase the
disposable income for the population.
In addition to tax credits, the Canadian government has introduced a distinct indigenous
community support Fund. This is meant to ensure vulnerable Canadian have access to necessities
such as food shelter and clothing. With the current viral outbreak, vulnerable groups of people
are unlikely to food basic welfare necessities hence the Fund. The fund will boost the welfare of
these indigenous Canadian groups.

COVID -19 Response 2
Equally important, 3.7% of the Canadian gross domestic product has been allocated to
support businesses through income and sales tax deferrals. The impact of this tax deferrals is to
secure employment since the businesses will still be operational.

COVID -19 Response 3
2.
In an attempt to cushion its citizens, the Canadian Bank has offered mortgage
payment relief and flexible repayment arrangements for credit cards and other credit lines. The
Canadian government has pledged C$1.1.Billion to its health care system to contain the COVID-
19 outbreak. Further relief programs for businesses and vulnerable population has been catered
for by the Bank. Specifically, deferral on payments for small enterprises has been effected (Bank
of Canada, 2020).
Through transfer payments offered to the vulnerable Canadian population, the
disposable income of such vulnerable groups will be raised(Romer & Romer,2014).. Further, the
welfare of the vulnerable groups has increased so they will be able to purchase necessary goods
and services thus boosting economic activity. However, these transfer payments might contribute
to a budgetary deficit.
In addition to the repayment deferrals, the Bank of Canada has lowered its monetary
policy by lowering its interest rates. Whilst this move will encourage consumer spending,
investment due to low repayment rates, it might take long for repayment to happen due to the
economic uncertainties. Moreover, lower interest rates might lead to inflation which might ruin
the economy further.
Also, the Bank has created large scale asset purchase programs to boost liquidity in the
Canadian financial market. This is aimed at enabling its citizens to easily trade their bonds for
cash during such hard economic times.

COVID -19 Response 4
3
Role of households in the Product Market and Factor market.
Worth noting, the circular flow diagram is a representation of how the economy works.
Under the circular flow diagram, households play a consumption role in that they make use of
what firms make or offer in the product market. By purchasing finished products, households
consume what firms have made.
Also, in the factor market, households are a source of capital. This occurs when
households provide monetary investment to the firms.
Further, in the factor market, households offer land to be used by firms.in this regard,
households pay an enabling or supporting role to firm activities.
Additionally, households might supply labor to the firms. In this regard, households act
as a factor of production to the firms. Labor is necessary for the production of goods and services
An example of a product market is a farmers market offering fresh groceries to
households.

COVID -19 Response 5
Role of firms in the product and factor market.
In the product market, firms are service providers. This is because firms offer their finished
products to households to make a profit hence playing the role of a service provider of finished
products and services.
In the Factors market, firms are consumers of factors of production. These factors
include raw materials, labor, and capital. This factors of production are necessary for the making
of finished products and services.
An example of a factor market is a commercial real estate agency that offers office space
for rent.
.

COVID -19 Response 6
4
Alongside the demand-side policies, there are supply-side policies that boost
economic activity. Notably, supply-side factors are ideal because they encourage a productive
and efficient economy(Riley,2010). These factors include privatization, education and training
investments, the flexibility of the labor market, reduced tax rates and trade union
powers(Pettinger,2019). Through quantitative easing, investment is encouraged which could stir
economic activity.
Through reduced taxation, laborers have an incentive to work due to the increase in
disposable income. Further, there will be an increase in the supply of labor thus increased
economic activity in the long-term.
The flexibility of the labor market encourages more workers to seek employment thus
boosting economic activity in the long run. With flexible rules and working hours, workers are
likely to take up part-time employment opportunities thus boosting the rate of economic activity
in the long term.
Better industrial relations improve the productivity of labor in the long run. Excessive
union regulations are likely to inspire industrial strikes which affect the production of goods and
services in the long –term.

COVID -19 Response 7
Privatization and deregulation encourage the efficient running of economic activities. The
fact that private businesses entities are motivated to make profits, they will cut costs to boost
long term productivity.
6
The preference for late morning classes over early morning classes is that students do not
forego morning hour sleep. This makes the loss of extra sleeping hours in the morning as the
opportunity costs.
Also, students prefer late morning classes because morning traffic is hectic due to the
massive number of people going to different destinations. This is prompted by the fact that most
economic and social activities start between the hours of 6.00 a.m to 8.a.m.In this scenario,
students get to forego the heavy traffic which is time-consuming.
Moreover, it is less costly to transit in late morning hours as compared to the early
morning. Due to the morning rush, there are many people on transit, heavy traffic, and higher
fare levies. The high transport cost is since much fuel is consumed in heavy traffic. In this case,
students get to save money on transport during late morning hours as compared to the early
morning hours. In this regard, the low fare is the opportunity cost.
Instead of attending early morning classes, students might prefer to engage in a part-
time employment opportunity. In such a case, a student might prefer to work early morning get

COVID -19 Response 8
wages and still attend late morning school sessions. If the student attends the early morning
class, the opportunity costs it wages from the part-time employment opportunity.
Another preference for attending late morning classes is the marginal benefits that come
with it. For a student, additional or marginal benefits of attending late classes might be tutor
preference, sitting comfortably in the early morning is crowded. In this case, an earlier class
might wipe off the marginal benefits of the late classes.

COVID -19 Response 9
6
Essentially, automatic stabilizers refer to fiscal policies meant to correct fluctuations in the
economy under normal operations (Thoma,2010).. Usually, automatic stabilizers take the form of
taxes and transfer payments.
Specifically, the automatic stabilizer is rolled out to counter the economic recession.
(Mackay, 2016). This is effected through reduced taxation so that households and businesses
have much income due to payments and tax refunds. Under the circumstances, child care benefits
and unemployment insurance is meant to increase the income of household and businesses to
boost economic activity by encouraging expenditure and consumption habits thus raising the
aggregate demand for goods and services.
Pro
As a consequence of automatic stabilizers, tax profits stem from the implementation of tax
refunds (Fuss & Palacios, 2020). Through tax cuts, businesses and households pay less in
taxation when the income drops due to an economic shock (Lee & Sheiner,2019).
Also, through transfer payments, automatic stabilizers boost the rate of disposable income for
households and businesses.
Cons
Sometimes, automatic stabilizers are responsible for budgetary deficits during an economic
recession. In the case of a supply shock economic recession, automatic stabilizers will drive up
inflationary pressures which aren’t the intended outcome.

COVID -19 Response 10
References
Bank of Canada. (2020). COVID-19: Actions to Support the Economy and Financial System.
Retrieved from https://www.bankofcanada.ca/markets/market-
operations-liquidity-provision/covid-19-actions-support-economy-
financial-system/
Fuss, J & Palacios, M. (2019). Fiscal Policy and Recessions: A Primer on Automatic Stabilizers.
Retrieved from https://www.fraserinstitute.org/studies/fiscal-
policy-and-recessions-primer-on-automatic-stabilizers
International Monetary Fund. (2020).Policy Response to COVID-19. Retrieved from
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-
COVID-19
Lee,V & Sheiner,L.(2019). What are automatic stabilizers? .Retrieved from
https://www.brookings.edu/blog/up-front/2019/07/02/what-are-automatic-stabilizers/
Mackay, A. (2016).The Role of automatic stabilizers in the U.S Business cycle. Retrieved from
http://people.bu.edu/amckay/pdfs/autostab.pdf
Pettinger, T. (2019).Policies for Economic Growth. Retrieved from
https://www.economicshelp.org/blog/5272/economics/policies-for-
economic-growth/

COVID -19 Response 11
Riley, G. (2010). Unit 2 Macro: How can supply-side policies help in a recession?. Retrieved
from https://www.tutor2u.net/economics/blog/how-can-supply-
side-policies-help-in-an-economic-recession
Romer, D.C& Romer, H.D. (2014). Transfer Payments and the Macroeconomy:
the effects of social security benefit changes, 1952-1991.Retrieved from
https://www.nber.org/papers/w20087.pdf
Thoma, M. (2010).The importance of Automatic stabilizers to the Economy. Retrieved from
https://www.cbsnews.com/news/the-importance-of-automatic-stabilizers-to-the-economy/