Question

Analyse how the following events will affect South Korea’s economy using the AD-AS diagram. In response to the Covid-19 pandemic, President Moon announced a supplementary budget in April 2020 to increase government spending by KRW 8 trillion to fund an emergency relief program. At the same time, firms face an increase in the cost of production due to unavailability of materials. What would happen to the output and the price level in the short run and long run in South Korea? Diagram/s are required to aid your explanation.

Answer 1

Since the cost of production has increased due to the fall in the availability of raw material. So here the supply curve has shifted to left and price has increased sharply. Output has declined to the level of y1.

The expansionary fiscal policy would cause the rise in the aggregate demand to right thereby leading to the rise in the output and price level

Over the long run, there will be a fall in the price and wage if economy is below the full employment level.