Question

The following information is extracted from an article1 about Coronavirus relief measure in Hong Kong. Hong Kong’s embattled leader on Wednesday unveiled her government’s biggest coronavirus financial relief package so far, offering a HK$137.5 billion (US$18 billion) lifeline to save ailing businesses and ensure some 1.5 million workers would continue to get paid in the tough months ahead. The government would, through employers, pay 50 per cent of salaries for half a year, each worker’s monthly subsidy capped at HK$9,000. Many small businesses are seriously affected by the Coronavirus. For example, some Chinese restaurants revealed that they might close their business in next few months. 1Coronavirus: Carrie Lam unveils Hong Kong’s biggest Covid-19 relief package yet, worth HK$138 billion, to ensure 1.5 million workers still get paid. SCMP. 8th April 2020.

a) Starting with long run equilibrium, show how small business are affected by the Coronavirus. Explain with aid of diagram.

b) The Hong Kong government proposed to subsidize the salaries of business. Discuss why some small business still decide to close in short run. Explain with aid of diagram.

Answer 1

• Long run equilibrium suggests Coronavirus shall have massive impact due to high unemployment structurally and cyclically which will reduce aggregate demand and consumption and hence real GDP will fall massively and so will inflation.
• 
• Even if subsidies are provided to workers, many of them wont return to work causing disruption and small firms have lower business potential and higher fixed costs in short run and long run and thus forced to shut shop due to unviability and unsustainability.

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