Question

 

Which of these curves (MP curve, IS curve, Phillips curve) do you think have been impacted by the Covid-19 crisis? How so?

Answer 1

In my opinion the Covid-19 crisis pandemic has affected the Phillips curve. As per the economic concept of the Phillips curve the inflation and unemployment shares an inverse and stable relationship in an economy. The main reasoning behind it is that in a market economy wages are quite inflexible or sticky, thus unemployment is bound to rise if individuals refuse to accept lower wages. A highly infectious virus - Covid-19 has caused an era of high inflation and high unemployment. The outbreak of Covid-19 has lead to disrupt supply chain causing a negative supply shock. In the enclosed graph-1 we can see that the adverse supply shock caused a SRAS curve to shift towards left as the production costs have increased thus causing an increase in the price
When the policy makers use the expansionary policies: increase government spending, lower interest rates, and/or reduce the taxes it will shift the AD curve up as depicted in Graph-2. However the increase in employment results to an increase in the inflation rate (price level). On contrast when policy makers decide to fight inflation as depicted in Graph-3 unemployment rises and also the GDP declines.