Question

- The jobless claims in both the United States (US) and Europe have hit more than 30 million each due to Covid-19, which is expected to rise further in the coming weeks. This implies an unprecedented slowdown in two of the world's largest economies and thus a lower consumer demand.

How this rise in unemployment would affect the inflation and interest rates in these regions (US and Europe)? Provide the reasons for your answer .

- Oil prices have gone down significantly since the start of this year. Most of the developing markets that rely on imported oil can benefit from low oil import bill due to unprecedented decrease in oil prices.

How it would affect the currency exchange rates, inflation and interest rates in developing economies? Provide the reasons for your answer.

Answer 1

Due to Covid-19, unemployment in developed economies will be basically due to slowdown or production and decrease in demand of non addictive luxury and non essential items. Millions of people will be unemployed and this will raise demand of essential products like FMCG items, pharmacy products and aricultural products. So, essential products will maintain their price whereas luxury items like cars, branded clothes etc. will be cheaper. Further, government may increase taxes to recover government spending for essential expenditure leading to increase in price. Overall result might be an aggregate increase in price of every commodity, i.e. an increase in inflation. When it comes to interest rate, it is likely to decrease as the economy is contracting and hence, lending is quite uncommon, asl because many business are closed down due to Covid-19.

Further, taking the examples of developing and/or Asian countries who are not badly affected due to Covid-19, like India or Singapore etc., we can say that if they remain less affected by Covid-19 untill some effective treatment or vaccine is discoved, they will gain in long term. Obviously, currently they are also suffering from internal lockdown, and pressure from global depression. But in long term, due to reduced crude oil prices, their economy will get a positive boost, currency valuation will be such that Indian Rupee may get strengthen against USD in long run. Indian immigrants in US will face problem and may travel back to India and there will be some job crisis in India and other such developing nations too. But overall, Economy will resurect and reach to the same level where it was 6 months go in next 6 months. In developing countries, multiple factors are working in both positive and negative direction, so the overall resultant is negative for now but prospect is positive for future. Interest rate will decrease for a while and will be upgraded later whereas inflation will be slightly high leaving aside common FMCG goods which will be on regular price.