Extended Essay

Evaluation of the U.S CARES Act in

COVID-19 recession recovery

Research Question: To what extent was the CARES Act effective in

stimulating economic recovery in the United States during COVID-19

recession?

Examination Session: May 2025

Word Count: 3976 words

IB Group: 3

1
Contents

1 Introduction 3

2 Theoretical Hypothesis 4
2.1 Expected Impact of the CARES Act . . . . . . . . . . . . . . . . . . . . 7

3 Economic Analysis 8
3.1 Impact on Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1.1 Impact on Business Investments . . . . . . . . . . . . . . . . . . . 11
3.1.2 Sector-specific Impact . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Monetary Policy Influence . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4 Long-term Growth 17

5 Evaluation 18

6 Conclusion 19

7 Bibiliography 20

2
1 Introduction

COVID-19 pandemic triggered the most severe global economic tragedy after the Great
Depression in 1929 (Gopinath, IMF). It was a dramatic global reduction in economic
activities, due measures taken to curb the virus. It shrinked the world economy by a
whopping 3.5% in 2020 (IMF, 2021). The United States of America experienced the
most sharpest and significant decline in there GDP since 1946, contracting by 3.5% in
2020 (Bureau of Economic Analysis, 2021).

Due to massive layoffs and closure of businesses, US’s unemployment rate soared to
an all time high (since the Great Depression) from 3.5% in February 2020 to 14.7% in
April 2020 (U.S. Bureau of Labor Statistics, 2020). The recession affected many major
industries in the country, including airline, healthcare, hospitality etc. In March 2020, it
was predicted that without any government intervention most airlines would be stand-
ing on the verge of bankruptcy (Business, 2020). During the same month, the National
Restaurant Association predicted a decline in the sales in the next three months by $225
billion which will lead to around 7 million individuals losing their jobs (Warren, 2020).
All this prompted low consumption, higher unemployment rate, low investments, low
consumer and business confidence and an overall economic uncertainty.

Recession is significant decline in the level of economic activity in an economy. During

such times the government implements an expansionary demand-side policy —fiscal or
monetary. Fiscal polices are measures taken by the government, like change income tax
level or government spending. Whereas, monetary policies are measures taken by central
bank, like influencing money supply and interest rates. Both to accomplish macroeco-
nomics objectives: stable economy, lower unemployment rates etc.

The US government in response to economic fallout, passed a $2.2 trillion economic

stimulus bill known as the CARES Act or Coronavirus Aid, Relief, and Economic

3
Security Act on March 27 2020 (Hulse & Cochrane, 2020). This was the largest finan-
cial rescue package in the history of United States. CARES Act was 10% of the country’s
GDP in the year 2020 (JP Morgan, 2020). This economic stimulus was much larger than
2009’s $831 billion stimulus act passed as response to the Great Recession (Kambham-
pati, 2020). The key provisions of CARES Act included direct payments to individuals,
expanded unemployment benefits, financial support to small businesses through PPP. In
addition to that, the act also allocated funds towards merit goods such as healthcare,
education and state and local governments (Re, 2020).

The CARES Act is a prime example of the use of expansionary fiscal policy in recession
recovery. The study and analysis of CARES Act will allow us to evaluate the effectiveness
of fiscal policies. This paper will dive into the evaluation of how successful was the US
government’s injection of money into the economy to restore and stabilize the economy,
and what impact did it create on economic growth, unemployment and on different sectors
of the economy.

2 Theoretical Hypothesis

Keynesian economics argues that government intervention becomes important during

economic shutdowns. During a recession, the country’s economy faces a recessionary
(or deflationary) gap, as shown in Diagram 1. This implies a lower level of output to
the full employment level. In such cases, a government implements an Expansionary
Fiscal Policy to increase the aggregate demand, promoting consumer spending, increased
investments, high consumer and business confidence and to boost the economic activities.
A government can increase government expenditure on merit goods and services, cut down
income taxes to increase disposable income and reducing business tax to amplify business
activities, to increase economic activities.

The graph above shows the use of the expansionary fiscal policy in increasing the

4
 Figure 1: Expansionary Fiscal Policy

aggregate demand. Before the implementation of the policy, the economy was producing
at a, at price level P1, which falls below LRAS (Long-run Aggregate Supply) indicat-
ing the incapability of the economy to produce at the full employment level. When the
government injects money into the economy through increase in government spending or
reduction in taxes the economic activities increases and so does the aggregate demand,
hence the AD shifts from AD1 ⇒ AD2, shifting the new equilibrium from point a to b.
Though, this also increases the price levels from P1 ⇒ P2 and real GDP from Ye ⇒
Yp. The increase in aggregate demand signifies the increase in consumption, investment,
consumer and business confidence etc. Additonally, an increase in AD leads to a trade-off

5
between inflation and unemployment, in the short-run. An increase in AD results into a
decrease in unemployment, as firms are incentivized to hire more. The Phillips curve di-
agram below shows the relationship between the rate of inflation and unemployment level.

Figure 2: Trade-off between inflation and unemployment

The Phillips curve is a representation of the trade-off between inflation and unem-
ployment. In the diagram, point “a” represents the state before policy implementation,
having lower inflation and higher unemployment. As inflation increase from I1 to I2 due
to the fiscal policy, the unemployment level drops from U1 to U2. Hence, representing
the short-term dilemma which US is likely to face.

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 The implementation of the CARES Act is a case study of the use of Expansionary
Fiscal Policy to recover from the recession caused by the COVID-19 pandemic. The
government of the United States of America injected money to increase the aggregate
demand and ultimately increasing economic activity. They used several measures to
stimulate economic growth.

2.1 Expected Impact of the CARES Act

The fiscal stimulus created by the CARES Act is expected to boost economic growth and
stabilize unemployment rates. The $300 billion of direct cash payments to individual peo-
ple who submit a tax return in America and the $260 billion in increased unemployment
benefits is expected to increase household consumption, which constitutes around 70%
of U.S. GDP (Gross Domestic Product) (Farrell & Farrell, 2020; Roll & Grinstein-Weiss,
2020). The introduction of Paycheck Protection Protection (PPP) was designed to pro-
vide forgivable loans to support small businesses with an initial funding of $350 billion
(later increased to $669 billion) to preserve business activities, prevent business closure
and maintain the economic output (Tuytel, 2021). These supply-side policies should
in turn lead to a growth in country’s GDP because of the recovery of overall consumption
and business activity.

The combination of PPP, tax relief and loans should incentivize businesses to retain
workers and support unemployed workers, hence stabilizing the reducing unemployment
rate. Additionally, the injecting of money into the economy should increase consumer
demand, encouraging businesses to rehire the laid-off workers or expand there opera-
tions which would further reduce unemployment. The stimulus checks and enhanced
unemployment benefits are expected to immediately boost household consumption by
increasing the disposable income, and it is hypothesized that the middle and low income
families would spend their additional income on essentials like food, rent, healthcare etc.
prompting to an increased demand drive in the sectors like retail, food and housing.

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 It is also expected that the there would be unevenness in the impact of CARES Act
on different sectors. For example, sectors like tech and e-commerce were expected to
recover quickly due to the high demands during the lockdown period. On the other
hand, sectors like airline, travel and hospitality will struggle a little longer than other
because of the pandemic restrictions. CARES Act also aimed to cushion the financial
strain for vulnerable group and reduce income inequality by supporting the low-income
households , by measures like direct payments and unemployment benefits. Though,
despite of all these efforts to mitigate the income disparity, the economic recovery will
disproportionately benefit the wealthier group because of their ability to invest in the
booming sectors like tech.

3 Economic Analysis

3.1 Impact on Economic Growth

Immediate growth of the economy was one of the most prominent reasons for the imple-
mentation of the CARES Act by the government of the United States of America. Under
the policy the government took multiple measures to increase economic activity in the
country, distribution of stimulus checks through Direct Payments was one them. Direct
payments boosted the disposable income for the people of America during the time of
economic uncertainty, particularly for the low and middle income households. Disposable
income is the income left after the deduction of taxes or social security charges, left to
be spent or saved. The CARES Act provided direct stimulus payments of $1200 to every
adult and an additional $500 for each child (IRS, 2020). The three rounds of Economic
Impact Payments (EIPs) provided a much needed support to low income households,
driving the increased consumption. Low-income households tend of have high Marginal
Propensity to Consume (MPC) which is very crucial in increasing the aggregate demand.
The Marginal Propensity to Consume is the proportion of the additional income which
the households spends on consumption, rather than saving it. It is essentially the per-

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centage of extra income is used to buy goods and services. MPC varies by income level,
because households with low-income would have higher MPC as they are more likely to
spend any extra income on necessities (for e.g., food, housing, etc.), whereas the wealthier
households will tend to save more.

Around 92% of the households earning less than $75000 received the first stimulus
payments in April 2020, followed by round 2 in January 2021 and round 3 in March 2021.
The first, second and third rounds of payments were $1200, $600 and $1400 for a fully
qualifying adult respectively, and $3,400, $2,400 and $5,600 for a married couple with
two dependent children (Peterson Foundation, 2024). The third-round stimulus payments
were the most generous.

Figure 3: Impact of stimulus payments on consumer spending (Danziger Murphy, 2022)

The graph above shows a substantial boost in the personal income and consumer
spending as a result of stimulus payments. As intended by the government, the per-
sonal disposable income (red line) increased significantly. The first round of stimulus in
April 2020 caused an immediate increase in the personal disposable income, increasing
to 13.7%. However, the personal consumption expenditures (blue line) has a delayed

9
and gradual increase due to consumer uncertainty and pandemic restrictions. Similarly,
round 2 and 3 of stimulus payments spiked both the personal disposable incomes and
personal consumption expenditure.

The spending patterns of low-income households lead to an increase in the economic

activities of sectors like food and housing. Though, many households spent the stimulus
amount of essential items. A significant number of American citizens used a portion of
the money to pay-off debts (like credit card debts) or build savings. Additionally, U.S.
credit card debts fell by around 14% after the direct stimulus payments, which was the
largest drop in the past two decades. More than $80 billion in the credit card debt was
paid down by American households by the end of 2020 (Carpenter, 2021).

The measures taken under the CARES Act lead to an unprecedented increase in the
GDP. As seen in the line chart below, the U.S. economy experienced a contraction of
-31.4%, in Q2 2020, because of the strict measures to curb the pandemic, lockdown,
business closure and reduced consumer activity. Due to the $2.2 trillion CARES Act
which included direct payments, unemployment benefits, PPP etc., Q3 2020 saw a historic
rebound in GDP, growing by 33.4%. This was the highest quarterly growth on record in
the history of the United States of America (Board, 2020).

Figure 4: Quarter wise growth in U.S. GDP

Consumer spending is the largest the components of the GDP of U.S. As seen in

10
the graph below, it plummeted by -33.2%, the largest decline ever seen in U.S. consumer
spending economy. This resulted into massive lay-offs, consumer and business uncertainty
and inability to spend on services like dinning, travel and entertainment. After the
policy implementation, the consumer spending surged by 40.6% in Q3 2020, a massive
stack turnaround after the decline in the previous quarter. This was fueled by the fiscal
stimulus measures, especially the stimulus checks (Board, 2020).

Figure 5: Quarter wise growth in U.S. Consumer Spending

3.1.1 Impact on Business Investments

The United States federal government established a $953 billion business loan program
called the Paycheck Protection Program under the CARES Act, which was also a
fiscal measure to increase aggregate demand and improve the unemployment rates (Den-
nis, 2022). It aimed to give forgivable loans to around 5.2 million businesses across the
country. The PPP loans were primarily distributed to small and medium-sized enter-
prises (SMEs), with emphasis on sectors most affected by the pandemic. Around 87% of
the loans were $150,000 (O’Connell et al., 2020).

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 The primary goal of the program was to prevent layoffs during the recession. PPP
was designed to keep the working employees on a payroll and prevent widespread unem-
ployment. 75% of the business loans were used by the businesses to cover employment
expenses (Eddy, 2019). As per the data from the National Bureau of Economic Research
(NBER), the PPP loans helped in the preservation of 2.3 million jobs in the first phase,
leading to a massive reduction in the unemployment rates specially for sectors like retail
and services (Peterson Foundation, 2024). The business loans helped sustain the employ-
ment which in turn helped maintain consumer income level. People continued to receive
paychecks even during the shutdown, households continued to spend on essential goods
and services, ultimately mitigating demand-side shocks that could have deepened the
recession. This was very crucial in maintaining overall economic activity in the economy.

PPP also prevented multiple business closures. About 22% of the small businesses
in the country were at a risk of permanent closure in early 2020 without any external
financial help (Fairlie, 2020). The PPP served as lifeline for these businesses, giving them
the needed financial assistance. This financial assistance covered up to 8 weeks of payroll,
rent, mortgage interest, and utilities giving these business essential liquidity when their
revenue streams were disrupted by lockdowns (Dept. of Treasury, 2021).

After the businesses established themselves, they began using the leftover PPP funds
in capital reinvestment. This act refers to expenditure in long-term improvements. Sec-
tors like technology and healthcare were at the forefront of reinvesting the funds for
long-term benefits and adjusting to the new demands brought by the pandemic, such as
remote working capabilities or infrastructural improvements. Nearly 40% of the surveyed
businesses used the leftover PPP funds to enhance their digital presence (World, 2021).
All this in turn increased the level of economic activity, increasing the aggregate demand.

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 Figure 6: Quarterly growth of private domestic business investments

The bar graph above is the representation of the growth of private domestic invest-
ments in the U.S. from Q1 2020 to Q1 2021. Private domestic business investment is a
key component of AD. Quarter 1 saw a moderate business investment growth of about
5%. This period was the pre-covid economy when businesses were functioning in a normal
conditions. Q2 saw the most dramatic drop of -46.6% in private business investments.
This sharp decline reflects the recessionary effects of the COVID-19 pandemic. This was
a result of economic shutdown, causing businesses to halt or immediately reduce invest-
ments. Various sectors were affected by the government imposed pandemic restriction,
reduced consumer demands and low business and consumer confidence. Businesses re-
duced investments on capital goods, infrastructure etc. Q3 depicts a strong rebound of
22.9% in business investments. This recovery can be attributed to several factors in-
cluding the PPP and other fiscal measures, ease of pandemic restrictions and increase
consumer spending and overall increase in economic activity.

3.1.2 Sector-specific Impact

The CARES Act lead impacted different sectors differently. There was an overall un-
evenness in the impacts, some sectors saw massive immediate growth, while some had
to struggle due to pandemic restrictions. In this section, we will focus upon impacts on

13
the sectors like healthcare and retail and e-commerce. They were the most impacted and
that there recovery was crucial in maintaining overall economic resilience.

1. Healthcare Industry

Healthcare sector was extremely important during the crisis. Majority population
were dependent upon the country’s medical service due to the COVID-19 pandemic.
The sector was badly disturbed due to overall economic crisis and heavy patient
loads. It struggled to PPE (Personal Protective Equipment) shortages and lost
revenue due to elective procedure cancellation (Kaye, 2020). By mid-2020, over 1.5
million healthcare workers were laid-off (Anderson, 2020) and hospitals operating
revenue dropped by around 45% compared to pre-pandemic levels (Lalani et al.,
2023). Hence, government intervention through CARES Act and PPP was impor-
tant to cover losses, retain staff and maintain the overwhelming demand.

PPP funds helped the industry see a notable recovery. It helped the hospitals and
healthcare providers manage operation expenses during the pandemic stage. The
act established $100 billion in funding for emergency healthcare organizations (Bell,
2020). Additionally, the disaster-relief loans of up to $2 million at lower interest
rates ensured the retention of workers, maintaining of pay roll and paying rent,
lease and utility bills (Bell, 2020). This also helped the hospitals in maintaining
their capacity to provide services to those who need them, positively impacting the
overall well-being. Due the urgent medical needs caused by the pandemic, the
demand for healthcare services became highly inelastic, which in turn pushed for
more spending to meet the desired medical needs.

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 Figure 7: Shift in Demand for healthcare services

The graph above depicts the shift in demand for healthcare services due to pandemic
and become more inelastic. The curve D1 (before pandemic) is more elastic, mean-
ing the consumers are responsive and sensitive to the changes in price. Whereas,
the curve D2 (during pandemic) becomes inelastic, highlighting the fact that the
sector became less sensitive to price changes. Though, the demand in the healthcare
sector is usually inelastic, the urgent medical needs pushed the consumers to pay
more for the same or slightly reduced quantity. This also shows that the health-
care providers couldn’t afford reducing the services even thought their costs were
sky rocketing. The PPP helped healthcare providers cover these increased costs,
including wages and operational expenses, preventing closures or capacity cuts.

2. Retail and e-Commerce Sector

The COVID-19 pandemic brought a change in the consumer spending habits. To

capture this change, the retail industry transitioned to digital platforms. The PPP
helped in the the small and medium-sized retail businesses to transition into the
e-Commerce sector. Because of the consumer spending shift, the e-Commerce seg-
ment 19% sales growth in the third quarter of 2020 (i.e. Q3 2020) (International
Trade Administration, 2021). The growth of the e-Commerce sector reduced in-
efficiencies and optimized the supply chain to cope up with the pandemic related

15
 bottlenecks. Also, the shift in the consumer spending habits from brick-mortar
stores to online platforms drove faster recovery in retail sectors. As the e-commerce
industry thrived due to measures taken by the United States Federal government,
it created spillover benefits for sectors like logistic, warehousing etc. Spillover
benefits are the benefits that people receive when the economic activity planned is
not directly related to the transaction.

3.2 Monetary Policy Influence

Understanding the seriousness of the recession, the US Federal Reserve decided to imple-
ment measures of the monetary policy in March 2020, to work alongside expansionary
fiscal policy. Monetary policy involves central bank measures to stabilize the economy
and accomplish macroeconomic objectives, by altering money supply and interest rates.
The US Federal Reserve implemented an expansionary monetary policy to increase
the Aggregate Demand (AD). This involves a reduction in interest rates to incentivize
consumers to borrow more, i.e., to reduce the cost of borrowing.

Figure 8: Reduction in interest rates (Cachanosky et al., 2021)

In March 2020 the Federal Reserve made an emergency rate cut, bringing the federal
rates cut to a range of 0% to 0.25% (Milstein Wessel, 2024). As the interest rates fell,

16
mortgage rates dropped to a historic low of 3% in the year 2020 (Miller, 2020). The in-
terest rate cuts resulted in companies issuing more than $1.9 trillion in investment grade
corporate bonds. This worked along side the PPP loans, direct payments and unemploy-
ment benefits prompting the economy to rebound (Rennison, 2020). Thus, businesses
in the US reported an increased spending on digital tools and technologies due to easy
access to credits.

The synergy between fiscal policy and monetary policy is extremely important in
recession recovery. Lowering the borrowing costs increased consumer spending and in-
centivized business investments, targeting two important components of AD, i.e. Con-
sumption (C) and Investment (I) —AD = C + I + G + (X-M). These measures
helped the in reviving GDP growth.

4 Long-term Growth

The implementation of the CARES Act, significantly boosted the short-term GDP, in-
creased economic activities and provided relief to households, businesses, investors and
institutions. However, their are several long-term implications of the policy, which will
be discussed in this section.

The $2.2 trillion fiscal stimulus added to the federal deficit. This substantially in-
creased the national debt. A government falls into budget deficit when the total
expenditure extends beyond the total revenue, in a fiscal year. This spending is often
funded through money borrowed. It is predicted that by 2025 the national debt will
increase by 7.5%, which will result in crowding out private investments, ultimately slow-
ing down long-term economic growth (Dinerstein Huntley, 2020). Crowding out refers
to a decrease in the amount available to borrow for private business, due to aggressive
government borrowing. This will make it harder for companies to invest in R&D, making
the workforce less productive due to lack of resources, creating a downward pressure on

17
the wages leading to a 0.2% reduction in wages by 2025 and 2030 (Dinerstein Huntley,
2020). In addition to that, less capital will lead to a 0.2% decline in GDP during the
same period (Dinerstein Huntley, 2020).

Additionally, an increased reliance on e-commerce, and the use of PPP funds, by pri-
vate businesses, on new technologies will in turn create more structural unemployment
because of the lack of skilled labor. A change in the labor market is also a result of the
rapid adoption of digital technologies, because of the investment in infrastructure, sug-
gesting long-term structural shifts. The investment in new technologies, like e-commerce,
also influences the consumer behavior, altering the demand in various other industries.

5 Evaluation

The effectiveness of both the fiscal stimulus and the expansionary monetary policy highly
depends upon the time it takes to get to action. Implementing a fiscal policy faces delays
in processing as it involves bureaucratic processes and political considerations, and im-
perfect information for individuals. On the other hand, monetary policy takes relatively
longer to make an impact of the economy, because of uncertainty and low consumer and
business confidence. Alongside which, prolonged low interest rates discourages saving.
This can make the people more vulnerable to future financial shocks and decrease con-
sumer spending due lack of financial cushion, bringing about a slow economic growth in
the long-run.

In addition to these policies, the government can also implement supply-side policies
to tackle the deep recession. For example, the government can invest in human-capital,
particularly in promoting education and skill development. This can potentially decrease
structural unemployment by producing more skilled labor. The government can also
look into implementing industrial policies to promote specific industries which were badly
impacted due to pandemic, like travel and tourism.

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6 Conclusion

The Coronavirus Aid, Relief, and Economic Security Act (CARES) played a crucial role
in mitigating the COVID-19 recession. It provided direct financial support through stim-
ulus checks, unemployment benefits, and loans (PPP) to small businesses. It helped
the stabilize the economy, kept businesses afloat and maintained employment, specially
in industries like healthcare and technology. While the impact of the act was largely
successful, the impacts still varied for various sectors and demographics. For example,
sectors like retail and housing which were majorly struck by the recession took longer to
recover. CARES Act shows the importance of implementation of fiscal policy (govern-
ment spending) and monetary policy (Federal Reserve’s intervention) in recovery from a
recession. Future economic crises will likely require this coordinated approach to ensure
quick recovery across sectors.

Recommendations for Future Research

For a better understanding of recession recovery it would be valuable to compare

CARES Act with fiscal measures implemented by governments in other countries. Case
studies of UK (Coronavirus Job Retention Scheme) or Germany (Kurzarbeit program)
can help understand and analyze of fiscal stimulus help in increasing economic activity,
job retention and sectoral output ([Link], 2022; Connolly, 2020). Analyzing these
comparisons can yield insights over which measures are more fruitful in managing the
pandemic-induced economic downturn, and which can be improved for future policy re-
sponses.

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