Question 2 Analyse how the following events will affect South Korea’s economy using the AD-AS diagram....

Question 2

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.

Expert Solution

Due to Covid 19 , the Economy of South Korea , along with other nations, faced a major slump in aggregate demand , because of falling capacity of earning and selling( which is result of precautionary steps the market is taking against the pandemic). With this slump talking place, the employment levels are lesser than the normal rate of employment , the prices rates are fallen be because of depression in Economy and GDP growth is also low .

In short run, with a fiscal policy , as discussed in the question , the aggregate demand tend to rise. This rising aggregate demand causes the GDP to rise and price level also rises ( point B). This is the boost economy gets with expansionary fiscal policy.

In long run , the aggregate Supply falls because with rising employment opportunities , the wage rate will gradually rise , the foreign supplies are costlier after pandemic and production cost will also rise , as along the Economy readjust itself. Hence in long run, when the leftward shift of aggregate supply is seen,the Economy comes back to same level of GDP but the price levels are higher. This means the Economy has faced inflation in long run (point C) . Also the long run supply curve has also shifted leftward , as effected by pandemic.

See the diagram:

Rahul Sunny answered 1 year ago

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