Question

In: Economics

The current COVID-19 pandemic has caused large price reactions, for most financial assets. - 1 -Discuss...

The current COVID-19 pandemic has caused large price reactions, for most financial assets.

- 1 -Discuss how the price reactions can be understood in the context of equilibrium asset pricing.

- in light of your answer in 1), are the shocks likely to be permanent or transitory? Hint: Cash flows, discount rates, asset classes.

- Could we have a situation where prices are permanently negatively affected, but consumers are still better of (those that didn’t lose a lot as investors)?

Solutions

Expert Solution

The equilibrium pricing in the asset market is based on the demand for and supply of asset in the market. In current situation rational customers are not demanding assets. The quantity of asset supplied and the quantities of asset demanded must be equal. It is the market clearing. At present condition the asset market is going to depression. There is no investors come forward to demand the assets. There is insufficient demand in the virtual market for assets and securities.
These shocks are sometimes temporary in nature. But it is not easy to predict the asset market at current situation. Common people and businessman were uncertain about the lockdown and the restrictions. This affects the production level and total output. There is a huge cash flow can removed this disequilibrium cured in the asset market. The discount rates and asset classes were the other measures used to overcome this situation. Asset classes make the asset into different classes. So on the basis of different level of income can people can participate in the asset market.
The situation where price ne negatively affected is demand for stocks. When the price is negatively affected permanently causes the stock market crashes. Among different kind of shares and securities, the negative impact affect the consumption behaviour also. But the small investors face any negative effects from this shock. Even the customers are also unaware of this shock. Goods having hoarding capacity can also make this unaware situation. When the starting period of recession most of the people were unaware about its price and quantity. Because they are easily available to them.


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