Question

The recent COVID19 situation has resulted in many persons being unable to work and has led...

The recent COVID19 situation has resulted in many persons being unable to work and has led to a decrease in economic activity in Jamaica.
a. With the aid of a diagram, show the effect of this decrease in economic activity in the money market. Make sure to label your graph.
b. On the same diagram in part (a), show what should be the reaction of the Bank of Jamaica in this situation.

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Answer #1

a. Due to the covid 19 situation, economic activity has reduced leading to fall in aggregate demand of goods and services. This is depeicted by the leftward shift in IS curve leading to lower output and lower prices of goods. The situation is depicted in the diagram below:

b. Bank of Jamaica should use expansionary monetary policy to increase money supply and reduce interest rates that could boost investment in the economy and hence revive the economy out of the economic slowdown. This is depicted by the rightward shift of LM curve that brings the output back to original output level.

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