Question

In: Economics

This question is based on the current Covid-19 pandemic. The pandemic will cause a recession. Provide...

This question is based on the current Covid-19 pandemic. The pandemic will cause a recession. Provide two examples of sectors that will be particularly badly hit by this. Provide also two examples of sectors that will benefit from this. Use the business cycle model we saw in class (inflation on the Y axis and real GDP growth on the X axis) to show the effects of the pandemic on the whole economy. Think about it carefully: is there going to be any effect on aggregate demand? Why? Is there going to be any effect on aggregate supply? Why? Show the shift(s) on the graph and point out what we can expect to happen to GDP growth and inflation in the short run.

Solutions

Expert Solution

The two sectors which would be adversely affected due to covid-19 pandemic are

  • Airlines industry: Due to global lock downs and border closures, various cargo and passenger flights have been impacted adversely. It is evident from the fact that for the past 2 months, Air traffic has decreased by around 80%
  • Oil and gas drilling industries: lockdown of industries has led to negligible demand for oil as a fuel. This is evident from the fact that futures of oil is been trading at negative prices due to lack of storage capacity with the buyers and excessive stockpiling by the countries.

Examples of the sectors that will benefit from this:

  • Insurance sector may experience of boost in the coming time as it has made people conscious about their health and the associated economic risk.
  • Other industry that will benefit from pandemic is digital gaming as people have tremendously increase their leisure time on gaming. The digital technologies and telemedicine industry may experience of boost in the coming time

Impact on aggregate demand: aggregate demand has already fallen to a historic low. As, the chief of IMF Geeta Gopinath has recently expressed the negative global growth in the coming years which would be more painful than great depression of 1930.

Reason:
The income levels of the people have decreased due to this pandemic which will have impact on their consumption demand. Weakening Global growth would also lead to pessimistic business expectations driving investment demand in to downward direction. As far as exports are concerned, due to diminished incomes levels globally, there would be a fall in demand of luxurious components. All this would have negative impact on aggregate demand.

Yes, it would have an impact on aggregate supply as well. Since, industrial output has fallen drastically over the past few months which has driven up the prices of some essential goods. Aggregate supply may increase in long run with the technological improvements and healing of global supply chains but in short run due to production lags, it would be very difficult to increase it given the low market demand.


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