Question

In August 2020, Haiti and the Dominican Republic, two Caribbean economies, were hit by hurricane Laura, experiencing a negative aggregate supply shock as a result.(a)Haitians assume this is a one-time shock, so it is expected to have no wealth effects.Use the labor market and the production function to describe the effects on employment, output, and the real wage. (b) In the Dominican Republic the shock is believed to be permanent, so there is a negative wealth effect. Redo (a). What are the differences?

Answer 1

Wealth effect is from the behavioural branch of economics , stating that as value of asset rises people start spending more as they feel secured and confident about there wealth however the NEGATIVE wealth effect states that the value of asset will rise people will grib there spending

EXPLAINTION

Owing to the hurricane the supply has fallen however Haiti consider it to be temporary effect while Dominican as permanent

a) PRODUCTION FUNCTION -as shown above in "I' the production function will fall downward after the shock owing to adverse productive shock

LABOR MARKET - as shown in "II" ,being it is temporary supply shock in labor market initially at E1 now will move to E2 with fall in demand where labor will decrease from N1 to N2 and wages from W1 to W2

b) However domician believed it to be permanent as a result in market the price rose and quantity fell as given above for labor market of DOMINICAN with fall in supply ,supply curves shift to left from S to S1 making fall in labor and rise in wage from N to N1 and P to P1 respectively.as shown below

​​​​​​However production function will be same .

Key differences -

1. For Haiti, demand curve shifts to left however for Dominican supply curve shifts to left
2. For Haiti, wages fall while for Dominican the wages rise
3. For Haiti it is supply shock i.e. temporary with temporary term effects however if domician take it permanent it is more of recession that would take long term
4. For Haiti there is direct relation in labor and wage however for Dominican there is inverse relation between labor and wage

Conclusion :

If we take the shocks to be long or short there effects and after effects will differ however in this case Dominican would rationally have more loss as they take it as permanent in nature.