Question

How can we model the Covid 19 shock on the macroeconomy (output and inflation)? Is it a supply shock? A demand shock? How useful are the monetary and fiscal measures to mitigate this shock? Use the IS/LM/PC(/WS/PS) model to discuss.

Answer 1

Answer :

Covid 19 has impacted and shocked the economy to the great extent it has reduced the demand from the World wide ,household ,businessses , government sector and hence the businesses are producting and working below their capacity Level and hence the larger unemployment with low wages to those who are having employment .

Due to lockdown as the economy as a whole was closed to prevent spread of corona 19 the supply also largely get effected of those products which had demand as the businesses had to forcibly stopped working and labour was not able to give outcome production and supply in this way also get effected during the hard times of lockdown .

It adverse effect on the GDP As well when production is less in the country then the GDP of the country will surely be falled down as this in recent scenerio occured GDP Contracted by 32.9 in the second Quarter , india GDP Contracted by 23 % due to the same shock . It is supply shock .

Covid-19 is an unusual combination of supply and demand shocks. ... Both reductions in supply and demand lower real GDP.

Monetary Measures by the central bank or FED includes decrease statutory , cash reserve ratio , Decrease bank rate , Operation of open market and Fiscal policy includes the investment by the country government ,Taxation policy .These measures have helped to the some extent economy to restart taken by the various governments of the world during the lockdown due to covid 19 .The result of the same is reflecting in fast opening of the world and fast growth in less time after restart economy .

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