Answer to Question #193645 in Macroeconomics for Tsholofelo Phefo

Question

The Covid19 crisis and lockdown has been a supply response, the government Use the ADAS model, in conjunction with the IS of the shock and policy response.offered a R500bn stimulus package side shock to the South African economy. In to help cushion the blow.LMBP, to explain the supply and demand dynamics Where will equilibrium income and prices settle? Draw the graphs and explain the complete chain reaction. Total mark out of 30 2

Answer 1

The lock down triggered by the Covid-19 emergency has been a supply side shock for economy, so the government has announced an R500 billion spending package to assist the country. To avoid complications, the initial points in the figure below are supposed to be AD, AS, and AS2. Whenever there is a supply-side shock, After policy intervention, AS will rise to AS2 and then fall back to its original position.

AD-AS Model

As a outcome, the original position in the AD-AS model is A, which is the same as E in the IS-LM-BP model since here the shock is O since the points have been customized as the supply has been affected since the supply is transferred to AS2. In addition, the price shift from P2-P1 induced a transition in point B. Income/output also falls from Y1 to Y2. The IS-LM-BP curve was also affected as the initial equilibrium point E, and after the supply modified, the IS curve moved to the left at the new equilibrium point F. Now, the government proposes a 500 billion spending package to help the economy. In that case, the economy will carry the AS curve back to its original position, and then stocks, interest rates, and incomes will be returned to their original values. To avoid complicating the diagram, we will assume that the reconstruction is equal to the loss number, despite the fact that it is less than the original price.