Question

The Covid-19 pandemic and the lockdown that followed have served as multiple shocks to the South African economy. The initial 5-week lockdown limited mobility of people and the availability of goods and services, leading to contractions in aggregate demand and supply. Policymakers have responded with expansionary fiscal and monetary policy. The government has implemented a R500bn support package and the Reserve Bank has reduced the repo rate and extended liquidity in the bond market.

Apply any, or all, of the models that you have learned and explain the impact of the crisis and the policy reaction on the level of output, the interest rate and the price level in South Africa.

Make use of graphs and explain the chain reactions and impacts in your own words.

Answer 1

COVID-19 and subsequent measures to contain the spread of the virus such as lockdown in the country has plunged the global economy into an unprecedented recession. Most of the businesses have been forced to remain shut - down which has impacted both aggregate supply and demand in the economy negatively.

As virus gradually recedes and economy starts to reopen government has brought expansionary fiscal and monetary policies in the country to revive aggregate demand and overall economic activity in the country.

Fiscal policy expansion:-

An increase in government spending is expected to to increase aggregate demand from current level, thereby leading to an increase in output or real GDP in the country.

An expansionary monetary policy is expected to increase money supply in the economy which in turn would decrease interest rates thereby leading to an increase in investment spending, and aggregate expenditure in the economy.