What Students Should Know About Policy Response to COVID 19

Nowadays, you cannot escape from news about COVID 19 and arguments about what governments should do. I am pretty certain that future IGCSE Economics papers will have questions about this issue, especially discussions around the pros and cons of government policies to slow down or lessen economic recessions.

IGCSE Economics students should not just keep abreast of what governments around the world are doing but also the pros and cons/limitations of each policy.

One such policy is “Helicopter Money”. Helicopter money is printed specifically to allow governments to distribute among its citizens to enable more spending and stimulate a falling economy.

Helicopter Money is an expansionary fiscal policy that is financed by an increase in an economy's money supply.

Helicopter money requires both monetary and fiscal policies to be carried out together -- central banks and governments come together for this. The country's central bank prints a large sum of currency notes. These are printed specifically to allow the government to distribute it among citizens to enable more spending and stimulate a falling economy.

What are the pros of helicopter money?

1) It boosts spending and economic growth because it increases aggregate demand.

2) Helicopter money does not depend on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.

What are the cons of helicopter money?

1) The money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.

2) It could lead to a significant devaluation of the currency on the foreign exchange market. As more money is printed and supply increases, the value of the domestic currency could significantly decrease.