Answer to Question #251617 in Macroeconomics for Renlove

Question

2.3. COVID-19 adversely affected both our health and economic prospects, which in turn affected the behavior of economic agents—firms and households. Therefore, agents resorted to the ‘wait and see’ approach, which

 

means postponing consumption and investment due to increased uncertainty. a) what impact this change in behavior had on employment and output? b) what effect did it have on the aggregate demand? [Use diagrams to illustrate your responses]. [10 marks]

2.4. A stimulus package worth R500 billion was designed and by government of South Africa in 202 to keep businesses and households afloat. If the marginal propensity to consume equals 0.75, and R500 billion equals to the change in government spending (∆𝐺), how does change in government affected output and employment? [7 marks] Do you think the size of the multiplier is justifiable in the context of South Africa?

Answer 1

(a)

The rate of employment declined due to a decrease in investment projects that provide key employment opportunities. When employment rate goes down, the output in the economy generally decreases. A decrease in consumption rate also means that less will be produced.

(b)

Aggregate demand generally reduce because the rate of consumption falls. Also, due to unemployment, disposable income to be spent on consumption decreased hence demand was cut down. Minimal savings were also made resulting in decreased level of investment.

(2)

The change in government spending affects employment and output positively. The injection of the R500 billion into the economy by the government is meant to serve the citizens by alleviating them from poverty , through the creation of employment opportunities.

When more jobs are created, it means that the economic output will increase and this shall help the country in its struggle to recover from the impact of COVID-19.

I think the size of the multiplier used in the context of South Africa is justifiable. It effectively addresses the proportion of income that goes into taxes and savings in accordance with the current state of the economy.