Since the lockdown started, millions of weekly unemployment insurance claims have been filed. This is the...

Since the lockdown started, millions of weekly unemployment insurance claims have been filed. This is the impact phase of the virus, then the recovery will come. To understand the entire episode use the Business Cycle Model to explain what would be the path of the following variables:

GDP (Short run): Depreciate, Up, Appreciate, Down, No change

Consumption (Short run): Depreciate, Up, Appreciate, Down, No change

Exports (Short run): Depreciate, Up, Appreciate, Down, No change

Net exports (Short run): Depreciate, Up, Appreciate, Down, No change

GDP (Middle run): Depreciate, Up, Appreciate, Down, No change

Investment (Middle run): Depreciate, Up, Appreciate, Down, No change

USD appreciate/depreciate (Middle run): Depreciate, Up, Appreciate, Down, No change

Inflation (Middle run): Depreciate, Up, Appreciate, Down, No change

Interest rate (Middle run): Depreciate, Up, Appreciate, Down, No change

GDP (Long run): Depreciate, Up, Appreciate, Down, No change

Inflation (Long run): Depreciate, Up, Appreciate, Down, No change

Interest rate (Long run): Depreciate, Up, Appreciate, Down, No change

Solutions

Expert Solution

Answers are highlighted with explanation

GDP (Short run): Depreciate, Up, Appreciate, Down (lower consumption), No change

Consumption (Short run): Depreciate, Up, Appreciate, Down (lower disposable income), No change

Exports (Short run): Depreciate, Up, Appreciate, Down (lower production), No change

Net exports (Short run): Depreciate, Up, Appreciate, Down, No change (assuming imports also go down by the same amount as exports)

GDP (Middle run): Depreciate, Up, Appreciate, Down, No change (U shaped recovery, first GDP will stabilize)

Investment (Middle run): Depreciate, Up, Appreciate (People will invest in US as safe option), Down, No change

USD appreciate/depreciate (Middle run): Depreciate, Up, Appreciate (USD is safe haven currency in uncertain times and hence people will invest money in USD), Down, No change

Inflation (Middle run): Depreciate (demand will take time to go up to earlier levels, there will be depriciation before recovery), Up, Appreciate, Down, No change

Interest rate (Middle run): Depreciate, Up, Appreciate, Down (interest rate will be lower because people are investing because of safety option and not because of return- that will increase money supply and lower interest rate), No change

GDP (Long run): Depreciate, Up (recovery), Appreciate, Down, No change

Inflation (Long run): Depreciate, Up, Appreciate (consumption will rise with GDP), Down, No change

Interest rate (Long run): Depreciate, Up (higher return on investment as GDP grows), Appreciate, Down, No change

Rahul Sunny answered 1 year ago

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