In: Economics
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.
a)) 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.
b)) 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.
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.