Question

1. Supply shocks are usually modelled as leading to higher rates of price inflation. Explain the initial effect of a supply shock in the context of an oil price shock. Why is the effect of the pandemic supply shock different
2. The pandemic has been characterized by both negative supply and negative demand shocks. Many economic activities have been restricted by government order. Inflation in the Euro-zone remains stubbornly negative. Explain what generic short-term macroeconomic fiscal policy actions Euro-zone governments
3. World interest rates, including the ECB’s and the Federal Reserve’s main monetary policy interest rate targets, are approximately zero. Zero interest rates create a monetary policy dilemma. Explain what this dilemma is and how it affects monetary policy as defined by the Taylor Rule.

Answer 1

1. A supply shock occurs when an unexpected occurrence affects the supply of a product or service, resulting in an unanticipated price shift. This can be negative, positive depends upon the inflation rate.
2. Pandemic has been characterized by both kind of supply shock-The positive as well as negative supply shock. If Inflation negative It implies negative demand shock is greater in magnitude.
3. As the interest rates according to the US federal reserve voted to keep interest rates near zero in the wake of this pandemic and hinted that rate will remain same.