Question

According to economic articles and journals, Covit 19 pandemic will bring a detrimental recession to lots of countries. By using the aggregate expenditure model that you have learned, can you explain why will there be a recession? (Explain fully and clearly what is the main culprit in this model.) You should draw a graph as well and relate your explanations with the graph.

Answer 1

For the covid-19 pandamic all the country are closed their boundary so no people came inside the country or can't go outside from country.as it is transmit from men to men so all country completely lockdown so individual dosen't get contact to each other.all the markets,industry are closed.most of the work population of any country are engaged in private sector non-traditional sector.and if all the markets are closed and prodution will also stopped then many people will bacame unemployed and the unemployed people's income and comsumption power will also decrease.so the total market demand will decrease.we can see it in the fig belowin this fig we can see that the intial level of output is Y0 and intial rate of interest was r0 which is determined from the is-lm curve.where is curve equilibrium of commodity market and lm curve is equilibrium of money market so all the market are in equilibrium.at initial rate of interest the investment level will be I0 and employment level will be N0 at Y0 level of output.but for covid-19 the is curve shifts leftward so the output level falls fromY0 to Y1.as the aggregate demand of the country falls that's why the IS curve falls leftward.so rate of interest also falls to r1 but here the investment level will not increase as it is not profitable to produce anything in this situation.as all the production process will stop then investor will not invest although at lower interest.but as the level of output falls then the employment level have to fall as the demand for labour falls drastically which is shown in the fig.the level of employment falls from N0 to N1.so the unemployment in the country will increase.so the main culprit in this model is lack of aggregate demand.as all trades are suspended then the demand from outside of country will falls.but stop all production process will draw the country to a recession period as labour may be infected.jobless people dosen't demand as much before.