Question

One of the uses of economic models is to predict what will happen in different situations. The AS/AD model can be used to predict what will happen to Real GDP and the Price Level (inflation) given a scenario.

Provide a short description of a Zombie Apocalypse scenario.

1. Describe how it will affect one of the major economic variables (consumption, investment, government expenditures, imports and exports, capital, profits, labor force, banking, money...)

2. Will the effect primarily change AS or AD? Why and How?

3. What would be the expected effect on Real GDP and the Price Level?

4. You may do this for 2 different economic variables or scenarios.

Caution: The biggest problem students have with this assignment is trying to analyze too many things at once. For any given scenario there are probably a dozen or so things that will change. If you try to analyze all of them at once you will get nowhere. Pick one economic variable and describe how it changes. Then follow through with how this will change AS or AD, and hence Real GDP and the Price Level.

Once you are done with the first variable, pick a second variable or scenario, and work it through. In some cases, different economic variables will have opposite effects. This is common in AS/AD analysis.

Answer 1

In a zombie apocalypse, our civilization will collapse and zombies will overrun and overwhelm the social, political, law enforcement and military structure. People will get bitten & eaten by zombies. The undead will also turn into zombies. It will be a endless cycle. Shop, offices, goverment buildings all will be overrun by zombies. People in order to survive will create safe zones and will be limited to those areas only. Chaos would rule over order, stock markets, wolf street all will be closed and would be overrun by zombies. Only three things will rule survival - food, shelter and weapons. People with this be the only ones who can survive. Cities will be run by the military and not the burrecrates. Industries, media, health care, electricity supply, water supply all will be shut. Safe zones will be the only place to survive.Society would be living at the brink of extinction.

Lets consider the impact on Consumption. In the current worl people consumer various goods and services. Along with food, they consume other accesories, luxuries, services that give us better standards of living. During zombie apocalypse, the number of living people will be greatly reduced. The people who will survive will survive on the bare minimum food they can get themselves. Other forms of consumption wont be neccesary and moreover wont be available. Hence consumption levels would be reduced by huge amount. As consumptions fall the primary effect will be on aggregate expenditure of the economy and hence AD level falls. Hence AD curve will shift left and real gdp and price levels will both fall.

For the second variable lets take labor force and capital stock. I am taking them as one as the impact will be same for this two variables.The zombie apocalypse will reduce the population of the world. Most people will have transformed into the undead and the undead do not run factories or work in them. The labor force will be plunged to a great extent. The situation can be so worse that no single person will be able to go to work. Most factories and industrial settlements will be runover by zombies, There will be no electricity, resources, transport facilities required to run equipments and factories. Huge amount of machinery and buildings would be destroyed by the warfare between surviving humans and zombie. The production technology would be reduced to nil with the worsening of the apocalypse. This will greatly reduce the aggregate supply of the economy. The AS curve will shift by great margins towards the left. Real GDP will be plunged to extreme low levels while price levels will be greatly increased.