Question

Let's briefly imagine a country during the COVID-19 disease. It is now dealing with financial crisis, unemployment rises and the output of production is low.

a) Draw the financial crisis on an AS/AD analysis graph. (Please also graph the AD, LRAS and SRAS curves).

b) What could the central bank do to motivate the aggregate demand (AD) and this milden the financial crisis? Please show on graph for the money market (Interest rates on the vertical axis and quantity of money on the horizontal axis)

c) Now show the effect from b) on an AS/AD graph you drew in a)

Answer 1

a) Due to financial crisis, output fall and unemployment rises which means current output is below potential output level which result in recessionary gap in economy.

b) Central bank should adopt expansionary monetary policy which raise cash holding in economy thereby raising willingness to pay by individuals and result in rise in aggregate demand in economy.

Increase in money supply: It shift money supply curve to its right from Ms to Ms1.

c)