Question

Suppose an earthquake in a country has destroyed many power plants and factories and killed many people.
a What is the effect on the economy, and how can it be shown on an AD-AS diagram?
b Explain what policies are available for this country to stimulate economic activity in the short run. How is this action illustrated in the AD-AS model? What problems may result if they are successful?

Answer 1

Solution A:

An earthquake creates mass destruction and reduces aggregate consumption and also creates financial losses which reduces overall prices in the market and ourput.

Solution B :

Expansionary fiscal policy is best possible in this case when government spending increasingly and taxes are lowered to stimulate economy. An expansionary monetary policy can also be incorporated. However implementing these programs can raise economy's debt and at same time can raise inflation in long run.

answered by: anonymous