Critical Evaluation about the Effects of Monetary Policy on Economic Recovery Under Keynesian Model

Abstract

In response to the Covid-19 crisis and to mitigate its impact, countries have enacted a range of policies to stimulate effective economic development. In the context of Keynesianism, this paper evaluates the effectiveness of China's monetary policies enacted during Covid-19 as an example. Faced with tightening labor, supply, and consumption at home, China's central bank decided to ease monetary policy, increasing the overall money supply. Through the analysis of the Keynesian model, it is determined that the loose monetary policy used in China during Covid-19 has effectively stimulated aggregate domestic demand and increased GDP, but at the same time the price level has increased, the unemployment rate and the average domestic wage have increased. Through the evaluation of the loose monetary policy adopted by China during Covid-19, this paper proves that in the period of economic crisis, actively adopting loose monetary policy is effective, which is conducive to stimulating demand, increasing total output value, and conducive to economic recovery. At the same time, loose monetary policy will lead to higher unemployment and higher price levels. The living cost of residents will rise, and the instability of employment will lead to the decline of income expectations, which will affect the consumption willingness of residents. The government also needs to adopt policies to address livelihood issues after adopting loose monetary policy to deal with the economic crisis.