Question

QUESTION B2

1. Explain the impacts on consumption and investment after of the emergence COVID-19. In answering this question utilize the permanent income/life cycle hypothesis to make predictions about consumption and use Tobin’s-Q or the user cost of capital theory to make predictions about investment. Ensure any diagrams are correctly and clearly labelled.  
2. Explain the initial impact the emergence COVID-19 had on stock market prices. In answering this question focus on the role of expected future profits and expected future interest rates.   
3. Explain impacts on stock market prices, investment and output of monetary policy aimed to offset the short-term impacts of the COVID-19 shock. What happens when interest rates hit zero lower bound? Ensure any diagrams are correctly and clearly labelled.

Answer 1

Summary of Answer :-

1) Concept of Permanent income hypothesis with prediction about consumption.

2) Concept of Tobin Q with prediction about investment and graph.

3) Impact on Stock market.

4) Monetary policy outcomes to offset short term impact and its impact on stock prices and investment.

4) When zero interest rate hit lower bound and graph.