Answer to Question #193870 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

Assuming the initial points as AD and AS1 and AS2. when there is a shock on the supply-side AS will go up to AS2 again after policy intervention, again it will come back to its original position.

 

The initial position in the AD-AS model is A and IS-LM-BP model is E where there is no shock. Getting shocked the points have been changed as the supply got affected so supply shifted to AS2 and the point got changed to B with that the price changed to P2 from P1 and income/output decrease from Y1 to Y2. At the same flow the IS-LM-BP also got affected as the initial equilibrium point was E and after change in supply the IS curve shift to leftwards and the new equilibrium point is F with a low-interest rate and low income/output.

Now when the government will propose some policies (Fiscal and Monetary) to push the economy. It will again pull the AS curve back to the original position and there is the restoration of price, interest rate, and income back to the original position.