Question

Imagine a hailstorm damages a large number of roofs in Lubbock. A consultant for the Lubbock Chamber of Commerce writes a report on the impact of the storm on Lubbock’s economy. In the report, the consultant writes, “The recent roof damage from hail has a hidden upside: it will boost the Lubbock economy. Residents must now spend money repairing their roofs, which will mean additional sales for roof repairers; the roof repairers in turn will spend their earnings on other goods and services, setting into motion a chain reaction of increased economic activity. The storm damage will, ultimately, be a boon for Lubbock’s economy.” Is the consultant’s analysis correct? Why or why not?

Answer 1

The consultant's analysis is correct. When the residents will spend money on roof repairers who in turn will spend their income on other goods, the aggregate spending in the economy will increase. This increase in spending would further expand production in the economy and through multiplier effect, the output of the country will rise.

Looking through IS-LM, the IS curve would shift to right because of increase in consumption,C. Therefore,there would be more output in the economy.