Question

Coronavirus pandemic and resultant shutdown measures to contain it have plunged the economies around the world including Singapore into severe contraction. Assuming Singaporean economy was in long run equilibrium in the aggregate demand and supply (AD-AS) model before the pandemic (and consequent shutdown) started, answer the questions below:

a) Assuming the contraction in the Singaporean economy is mainly driven by demand side factors, Show the short-run effects of this using the AD-AS model. Carefully explain in words (100 or less).

b) Now assume that the contraction in the Singaporean economy is mainly driven by supply side factors, Show the short-run effects of this using the AD-AS model. Carefully explain in words (100 or less).

c) Which of the above mentioned two recessions scenarios, is more challenging for the policy makers to deal with (the government and the central bank)? and why? (explain in 50 words or less) (hint: think about the trade-offs in policy responses).

Answer 1

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Question:

Answer:

COVID-19 has affect the global economy. During the lockdown the economies affected worst All the major economic activities and industry interrupted worst. The major affected industries are aviation, tourism, hospitality, trading retain, construction etc. During the lockdown or and this pandemic million of people have lost their jobs and facing the problem of pay cuts also. More than one million of people have lost their lives. Thousands of business houses or companies are facing a deep financial trouble and hundred of companies gotten bankrupted. We are living in a global village and the world has became flat. We are highly dependent on each others. The major economies and market like, USA, EU, India, China affected worst that affected the trading volume and global demand worst. Singaporean economy is an open economy and highly dependent on the global economies. The Singaporean economy has affected worst

AD-AS model describe the change into price and output due to change in AD and AS. According to this model the AD is the main cause of economic slowdown or recession. When AD decrease its decrease output and price level and vice-versa. When price and output level decrease its decrease the production level and decreasing production level (AS or SRAS) decrease income level and increase unemployment level. Decreasing income level decrease AD the decrease price and output level further and the economy fall rapidly and get enter into recession. AD is widely affected by the consumption, investment, government spending and net export. Consumption contribute for more than 60% in AD. According to this model the government should adopt an expansionary fiscal policy and increase spending and cut taxes.

a). Answer:

You can see in the graph  Singaporean economy was in long run equilibrium at the point "E" now due to COVID-19 AD decrease and decreasing AD decrease AD and shift AD curve left from AD to AD1. At this new equilibrium point "E1" the price level decrease from P to P1 and quantity decrease from Q to Q1.

b). Answer:

You can see in the graph  Singaporean economy was in long run equilibrium at the point "E" now due to COVID-19 AS decrease and decreasing AS decrease AS and shift SRAS left from SRAS to SRAS1. At this new equilibrium point "E1" the price level increase from P to P1 and quantity decrease from Q to Q1.

c). Answer:

When the Singaporean economy is mainly driven by supply side factors because during  this recessions scenarios the price level is high and the confidence level of investors (producers) is very low. Other side any expansionary policy will increase the price level that will increase the inflationary pressure on the economy. Higher inflation discourage the consumption level and its further negatively affect the production level or investment.

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