Question

How is COVID-19 is expected to impact the short-run and long-run behavior of output/income, the price level and interest rates

Some pundits argued at the start of the crisis that COVID-19 was a exogeneous negative supply shock with stagflationary consequences (a rise in both unemployment and inflation) to follow, and other economists argue that COVID-19 was an exogenous negative demand shock with recessionary consequences to follow soon.

Answer 1

The Covid-19 pandemic situation, in the initial stage emerged as a supply side shocks (reduction of labour force and mortality)and then resulted in demand side shocks (fall in aggregate demand )all over the world. The prolonged lock down of economies resulted in recession followed by political instabilities in various countries. The fall in aggregate demand and consumption forced the government's to spend more in the economy in the forms of welfare and protective measures thereby increasing government spending and debt. The estimated growth rates of all economies shattered. Just like war finance, governments spending too much revenue on anti-covid packages. The pandemic situations affected the global markets, production fall to minimum level. Because of high level of precautionary savings and reduction in investment, the rate of interest began to decline.

The national and international movements of goods are restricted. The shortage of essential items in market created an inflationary situation. The economy on the one hand facing the problems of umemployment and lack of demand and on the other hand inflation occurring in a speedy way. The overall economies experiencing the situation of what we called stagflation.

The prolonged lock down of the economies as a result of the pandemic Covid-19 situation will in the long run reduce the output and economies may experience macro economic instabilities like unemployment, low consumption, low investment and inflation. There may be a decline of 2% GDP growth rate of several countries which are badly affected by Covid-19.