Answer to Question #203369 in Macroeconomics for Tshegofatso Seroka

Question

Represent Gqubule’s reasoning using the AD’-PC model from chapter 7:

2.1 The Covid-19 lockdown as a supply shock only. (6)

2.2 His monetary policy proposals. (6)

2.3 His proposals for what to do when too much money is created.

Answer 1

The Covid-19 lockdown as a supply shock only. (6)

The above image shows the effect of the shifts on the AD-AS curve on the Phillips curve.

Due to the effect of the Covid-19, the supply in the economy decreased this caused the supply curve on the AD-AS to shift to the left hence increasing the equilibrium prices in the market.

The effect of this causes the short run Phillips Curve to shift to the right( or upwards depending on how you view it)

This causes an increase in the inflation rate but the rate of unemployment remains the same as shown below in the image

Monetary Policy Proposals

Gqubule proposes that the government should have no say on how much money should be created but it should be determined by thorough market analysis of the economy's productive capacity.

Going by this proposal the analysis of aggregate demand and aggregate supply and how it impacts the Phillips curve, we can use the information in the image below;

In this image, when there is negative demand shock, the AD shifts to the left causing a lower output and price level. This indicates an increase in the level of unemployment and thus there is movement to the right upto point 2 on the Phillips curve.Here inflation rate reduces but unemployment increases.

In the contrary when there is a positive demand shock unemployment decreases but inflation increases.

A decrease in supply causes the rate of unemployment to remain the same but the inflation rate sky rockets.

An increase in supply will cause a decrease in the inflation rate at the same rate of unemployment in the short run.

His proposals for what to do when too much money is created.

According to his proposals the extra money created should be invested in the real economy and not in the financial markets.

Traditional fiscal and monetary policy should be used to control inflation.