Question

5. Answer the following:

(a) Make the case that real shocks are a plausible cause of the cur-

rent COVID recession. How is the COVID shock similar to and

different from the standard RBC shock? [3 points]

(b) Explain how the economy would react to the COVID shock in

the case where RBC theory is a good description of economic

dynamics. [3 points]

Answer 1

a)

In the year of 2020 , The corona virus continues it's foot slog around the whole world . Government take so many necessary steps like ; Shutdown , Lockdown , Social distancing , to physically disrupt the contagion . Due to which economic contagion is now spreading as fast as the corona virus disease itself . Now , Much further along the disease march , the economic costs are so much higher and decide the path ahead has become nearly impossible are many direactional of crisis are unknowable . In this terrible situation , pressing questions include the path of the shock and recovery , whether the economy of world can be able to return to their pre-shock output levels .

The shock's capability to damage an economy's supply side and more definitly, capital formations . When the capital stock doesn't grow and recovery is very slow , productivity is slow , the shock become structural . The shape of the shock is determined by the capacity of the virus to damage economics supply side , particular capital formation .

In RBC business-cycle alteration to a large extend can be considered for by real shocks . RBC (Real business-cycle theory) says that in any environments , cycles can arrise through the reactions of optimizing agents to real disturbances , such as random change in productivity .

b)

The spread of COVID-19 gives a considerable slowdown of economic activities . Because of which , the Governmnt and also the public can't get any idea , that how the economic's situation grows up . Where as in RBC (Real business-cycle theory) , business-cycle fluctuations to a large extent can be counted by real shocks.

RBC (Real business-cycle theory) theory shows business-cycle variations as the verygood / efficient response to exogenous changes in the real economic space . Therefore the Goverments should concentrate on long-run structural policy changes and not intercede through discretionary fiscal policy designed to smooth out economic short-term fluctutaion .