Question

Discuss how COVID-19, which is a health shock, translates into a real economic mixed aggregate demand and aggregate supply shock (sudden stop event) or problem. Highlight the key disturbances to households (employment, wages, consumption, savings, health, etc.) businesses (investments trade-inputs and outputs), Government (transfer payments, tax revenue) rest of the world (global supply chains, etc.).

Answer 1

Covid 19 has caused serious shocks and problems to both aggregate demand and aggregate supply worldwide. The supply problems can be gauged from the effects that lockdowns, quarantines, closed factories and shops will cause on the production side. Coming to the demand side, there has been a substantial increase in the price of commodities post covid 19 outbreak. This has caused serious demand effects. With depleting income levels and unemployment caused by the lockdowns, the disposable income with the population has also seen a fall which has affected the aggregate demand side. The global supply chains were also affected badly during the covid 19 period.

Concerning the households, we see that there has been a fall in the income levels post the lockdown mainly for the workers employed in the informal sector and this has also drawn down their savings for them to maintain the same level of consumption. With raising tensions between China and USA, people are left with no choice but to go for the costly American products. The drastic increase in the unemployment rates has also had an impact on the aggregate demand.

Businesses have also been affected badly due to the lockdown and fall in the production of the goods due to decreasing demand for the same. With the international trade coming to a standstill, the businesses were the worst affected. The governments were also compelled to provide social security to the people during the lockdown due to the falling income and employment levels. Government revenues has also seen a fall during the covid 19 period.