Use IS-LM diagram to show the impact of the pandemic on the Canadian economy

Expert Solution

Due to COVID - 19, people have postponed their consumption of durable goods, postponed their investments, countries are neither exporting nor importing goods. Government spending is I would say more than before.

Aggregate Demand = Consumption + Government Spending + Investmenht + Exports - Imports

Due to the overalll impact, aggregate demand have fallen by much which tends to shift the IS curve to its left from IS to IS1 while LM remains the same. It reduces the rate of interest from "i" to "i1" and output level to fall from "Y" to "Y1".

On the other hand, Central Bank is attempting to reduce the rate of interest such that people do not keep their money in banks or they have less incemtives to do so. Instead they are trying to keep money in circulation to avoid recession. It have shifted LM curve to its right from LM to LM1. It reduces rate of interest further to "i2" level and output level to its initial level of output at "Y".

Rahul Sunny answered 8 months ago

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