Question

In: Economics

The current pandemic caused by the COVID-19 has had a shock effect on the demand and...

The current pandemic caused by the COVID-19 has had a shock effect on the demand and has negatively impacted the rate of unemployment. That is, the aggregate demand has fallen as a cause of the measures taken to face this global epidemic, and at the same time, the rate of unemployment has risen.

  1. Use Keynes’s D-Z model and the Income-Expenditure model to explain what has hap- pened to the U.S. economy as a consequence of the COVID-19.

  2. Following the models used in point a. present possible solutions to this crisis and the assumptions you use to solve it.

3. How could a Job Guarantee program helps to resolve the dual problem of lower aggregate demand and high unemployment caused by the COVID-19 crisis?

Solutions

Expert Solution

In the wake of covid 19 the economic activities are greatly disrupted. Now the companies are reducing the production of goods and services unwilling. They are asked to shut down temporarily. So the production of essential goods are not taking place as per need. Instead the economy is now concentrating on producing medical equipment and other related goods as their demand has gone up drastically. The temporary termination of production has thrown out many from the jobs. There is a rise in unemployment which leads to a decrease in the purchasing power and hence a decrease in effective demand. But the government has taken necessary steps to keep the aggregate demand intact. This creates excess demand as the production has decreased in the economy. The aggregate demand and aggregate supply will not be in equilibrium.

A solution to this problem is to increase the taxes which takes away the income from the people.

3. As the people are loosing jobs there is a possibility of reduced effective demand as stated above, if the government didn't take any action to increase the income of the people. A job guarantee program is a solution to it. By such a program the people get employment and it will lead to an increase in their income. So the problem of lower aggregate demand and unemployment is solved altogether.


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