Answer to Question #280843 in Macroeconomics for John

Question

25. In Year 2020, financial markets reacted to the World Health Organization (WHO) announcement that the pandemic would be long term. Holders of U.S. bonds and U.S. treasuries converted much of the securities to cash in a phenomenon called "Dash For Cash". Without any government intervention or intervention of monetary policy, what are the macroeconomic effects if the economy starts at Less Than Full Employment (LTFE). Assume that the price effect dominates income effects.

Answer 1

macroeconomic effects if the economy starts at Less Than Full Employment (LTFE):

• The level of demand will be less than full employment level of output.
• In production, the economy's all resources will not be fully employed, some resources will be underemployed.
• Due to deficiency of aggregate demand, a deflationary gap will be created.