Question

Using appropriate diagrams, evaluate the effect of a global pandemic on a national economy as in many countries residents stay home, businesses close and economic activity slows down. Will the supply-side contraction inevitably lead to an increase in prices?

There are 18 marks available for this question: 10 marks for explanation/evaluation, 8 marks for diagram

Answer 1

We need raw material to produce goods which is imported for many goods, labor which is staying at home to maintain distance from the public, willingness to pay of consumers which have reduced due to loss of jobs of many people. Due to global pandemic, many firms have temporarily shut down production because they are not able to find raw material, labor to operate machineries etc. It will eventually result in fall in aggregate supply of the economy because there is fall in production of domestic goods. Before COVID we used to import from any other nation but that is also not possible. So we have to run our economy with reduced overall production of goods where demand remains the same. It will result in a rise in price from P to P1 and output falling from Y to Y1 in the diagram depicted below.