Question

6. Suppose the economy is at full employment equilibrium.

   1. What would be the initial effect of a pandemic such as one that causes 130,000 deaths and over 3 million infected.

   2. Give an example of something the government could do to alleviate the shock in part a.

Answer 1

Full employment equilibrium characterises an economy, where all resources are fully utilised and the economy is it at its full potential.

Initial effect of the pandemic would be decline in demand, consumer confidence, and companies shutting down, or working remotely. Increase in amount of savings vs. expenditure as sales start to decline and companies increasingly start cutting down costs, and performing pay cuts, or laying off workforce.

The government could increase social transfers so that people start to spend, even those who have been laid off, this will increase demand in the economy and drive up sales of atleast the essential commodities. Decrease the cost of credit and increase liquidity in the market, so that companies get cheap capital which could be used for investment or working capital requirements. Government can also provide further stimulus in finding a vaccine so that the economy moves back on track. It could increase government expenditure and utilise the public's savings by issuing bonds in the market, so that the money is allocated for infrastructure projects and other income generating opportunities, wherein money gets circulated automatically in the economy and demand starts to pick up with consumers marginal propensity of consumption starting to increase.