Question

1. Given the behavior of inflation and output growth, the Covid 19 recession is behaving like a short run aggregate supply shock. (true or false)

Answer 1

A supply shock represents an unexpected event that changes the supply of a product or commodity that is resulting in variations of pricing. The supply shocks can be either negative that would cause a decrease in the supply or it can be positive which could cause an increase in the supply. The given statement states that the Covid-19 recession is behaving like a short-run aggregate supply shock and thus it discards the inflation and growth phenomenon in the long-run. The statement is true in certain aspects but not so true in many more aspects. The following discussion would give the proper explanation for the same

                                    As a result of the Covid-19 crisis, most of the economies around the world have adopted ‘lockdown’ as a measure to combat the crisis situation. As a result of the lockdown measure, most of the production units have been shut down and the production of many items have been stalled in the initial stages. The manufacturing industries were also shut down which has caused a reduction in the production rates which has indeed caused a negative supply shock in the initial stages. But with the relaxation in the lockdown measures, most of the economic systems have been brought back to the former stages and this has brought the production mechanism to behave like normalcy if not normalcy till date. The production rates are increasing at a good rate and hence the supply shocks are now being reduced.

                                    The above analysis states that the given statement is true to some respect. But it has to be noted that the impacts of Covid-19 has not been eradicated from the system and there is a scope for further similar measures in the future also. Once the Covid-19 reach the initial stages, the production rates could be reduced again and the process may continue. This may result in long-run effects on the supply and production in an economy. Thus, it can be said that the given statement is true in most of the aspects, but may be found false if the situation becomes worse.