Question

Suppose that a pandemic disrupted normal economic activity in all countries. Thanks to negotiations oil exporting countries have managed to keep the supply of oil at its pre-pandemic level, however pandemic led to a change in oil prices. Suppose further that a successful vaccine has been found rapidly within a year, which in turn helped everything except the oil prices return to almost normal. That is to say that the impact of pandemic on oil prices has lasted longer than expected.

Use the IS-LM-FE framework under the classical assumption to analyze the general-equilibrium effects of this shock on macroeconomic variables such as output, real interest rate, real wage, employment and price level. (Hint: Assume that the leftward shift in labor supply is smaller than the rightward shift in labor demand)

Suppose that the classical assumption on the adjustment of prices and wages fails. Then, as a response to pandemic, what kind of Open Market Operation needs to be conducted by the Central Banks to restore the general equilibrium. Use the AD-AS framework to analyze the general-equilibrium effects of necessary monetary policy on macroeconomic variables such as output, real price level.

Answer 1

*Answer:

Due to pandemic covid 19 , there is recession all round but oil companies are able to supply the oil at the same rate. Therefore there is no effect on the supply and supply curve remain the same. But due to less demand by the people demand curve for oil will fall and there will be disequilibrium and due to the disequilibrium prices of oil product will decline and firms exporting oil face loses and reduce the supply of money. But this situation will be for a short time as the vaccine will be prepared demand for oil products will increase and supply of oil will increase again.

A)But due to the situation there will be recession and is and lm curve will shift backwards and rightwards respectively . Due to that interest rate will decline and national GDp and employment rate will decline and prices will increase.

B)In order to out of the situation automatic adjustment through wages prices and interest rate will fail therefore central bank will follow the expansionary monetary policy via the open market operations. In this central bank will buy the government securities and release money supply and in that case aggregate demand will increase .employment , output and income will increase and aggregate supply will also increase and price level will remain the same and GDP will increase and in this way , economy can be again at the path of growth.

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