Question

The Covid-19 pandemic and the lockdown that followed have served as multiple shocks to the South African economy. The initial 5-week lockdown limited mobility of people and the availability of goods and services, leading to contractions in aggregate demand and supply. Policymakers have responded with expansionary fiscal and monetary policy. The government has implemented a R500bn support package and the Reserve Bank has reduced the repo rate and extended liquidity in the bond market.

Apply any, or all, of the models that you have learned and explain the impact of the crisis and the policy reaction on the level of output, the interest rate and the price level in South Africa.

Make use of graphs and explain the chain reactions and impacts in your own words.

Answer 1

Covid 19 is a pandemic, which have adverse impact on the South African economy. It has adverse impact on the economic, social and political growth of nation.

Due to lockdown, there is complete lockdown in nation. Industries are closed and nobody is allowed to be outside the home without emergency .There is recessionary situation in South Africa. There is decrease in income, output and employment. Aggregate supply has decreased and due to decrease in supply, production has reduced, worker get unemployed and income has reduced. This also have impact on the aggregate demand. People have lost their belief in demand and consume less goods and services.

Due to decrease in aggregate demand, demand curve shifts backwards and due to decrease in aggregate supply , aggregate supply curve shift backwards . Due to that equilibrium price increases from p to p1 and equilibrium GDP reduced from Q to Q1. Due to decrease in real GDP unemployment in nations increases and economic growth decrease

Take action by monetary and fiscal policy-

Fiscal policy used by government is expansionary . Expansionary fiscal policy is the policy in which liquidity is injected to remove the recessionary situation and to increase income ,output and employment and to cover the output gap. Taxes are reduced and spending is increased. Due to that aggregate supply curve will shift rightwards and again full equilibrium will be attained. The reason is expansionary fiscal policy increase production and increase in production provides employment and employment leads to increase in income.

Expansionary monetary policy-discount rate is reduced and central bank buys government securities through open market operations. Increase money supply in banks. Interest rate falls and borrowing becomes cheaper. Investment increases. Increase in investment leads toward increase in production and increase in production provide employment and employment leads to increase in income.