Question

Business Cycle Analysis:

The recession of 1981-1982 was severe but relatively short. It was caused by the Federal Reserve sharply raising interest rates to combat 13.5 percent inflation rate. The inflation had started with the Vietnam War and it seemed to ratchet upwards and a wage and inflation push and shove.

The newly elected president Ronald Reagan went along with the Fed (his college degree was in economics) and he lost lots of support from the public.

When wage rates stopped raising, the Fed dropped interest rates and Reagan cut taxes and the economy came rushing back along with Reagan’s popularity. Hence this recession was labeled a V shaped.

Question, what will be the shape of our future recovery? Try to be detail as much as you can.

Answer 1

There may be four possible scenarios of recovery-1)Base case scenario-If the government relaxes lockdown and the economy returns close to normal ie to semi normal with travel restrictions and people moving less ,many work from home, and restaurants and cinemas open maintaining social distancing and so will be less crowded, recovery shape will be U.

2) Virus returns-If the virus returns in winter and people get only temporary respite,testing facilities will be more in the world , restrictions on individual freedom exist,spread of the disease will be less and growth will be slow.But with restrictions getting eased with the control of the disease, growth will recover very fast.The shape of recovery will be W.

3) Best case scenario--Recovery will be fast like in China due to lockdown which stopped the spread of the virus..The virus does not return and people have developed immunity against it. Recovery shape is V.

4)Worst case scenario-Lockdown continues till late in the year and economic growth slows down.Only in 2021, world will move very slowly towards recovery and only in 2023 world will recover from covid 19.Recovery shape will be L.

Which of these shapes will the economy take will depend on the different scenarios .Whether the economy will take U, V, W, or L. It is not likely to be V. It is not likely to be W either because of social distancing for a longer period and even if the virus returns people will develop herd immunity. By the end of the year a vaccine may be ready to control the virus.L shaped recovery is unlikely because steps may be taken to move the economy forward . Thus we may have U shaped recovery.