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The coronavirus pandemic will cause a global recession in 2020 that could be worse than the...

The coronavirus pandemic will cause a global recession in 2020 that could be worse than the one triggered by the global financial crisis of 2008-2009, but world economic output should recover in 2021, the International Monetary Fund said on Monday.
Use the IS-LM-BP model to explain what this shock will mean for the levels of output/income and interest rates in South Africa.
Draw the graph and explain the complete chain reaction.

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Expert Solution

There are two types of shocks one is the real sector and the other one monetary shocks. The real shocks belong to current account transactions, and monetary shocks - to capital account transactions and financial transactions.

There are two types of shock in the real one is the foreign price one is the domestic price. So when we discuss coronavirus effect the impact in every sector is negative showing a downfall in the economy. so when there is a shift in IS0 to IS1 the income shift from Y0 to Y1. so in initial point, BP will cross both the IS-LM point at E. then there is a shift the BP also change accordingly with a new equilibrium point B which represent a low income with high-interest rate r2. so the shock is it self define as a downfall in every sector and when there is a recovery it will assume to back its original positions.

Rahul Sunny answered 3 months ago
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