Assume the Canadian economy is at the equilibrium with output ??and price ?? and then the COVID-19 shock hits the economy. Studythe possible impacts of this shock on the following cases of theeconomy:
Demand Side (AD): (1.5 points)
a) What is the effect of COVID-19 shock on theIS curve (Note: start with the impacts on the Keynesian cross andthen explain the impact of the shock on the IS curve.) Support youranalysis with corresponding graphs.
b) Assuming the price is still ??, what will bethe impact of the shock on the AD curve? Brieflyexplain your answer using a corresponding graph.
c) How can the government alleviate thenegative effects of the shock on the AD curve?Briefly explain your answer by using just oneexample.
Supply Side (SRAS): (2 points)
d) What is the impact of the shock on the SRAScurve? Draw the graph. Support your answer using a realexample.
e) What kind of policy can the governmentimplement to alleviate the negative impact of the shock onSRAS?
f) What are some side-effects of these policies(parts c and e) on the economy? Briefly explain.
g) What will be the new equilibrium of theeconomy if the government does not intervene? Draw AD and SRAScurves for before and after the shock in one graph.
Money: (1.5 points)
h) According to the portfolio theories ofmoney, what are the factors that affect the demand for money? Howthey affect the demand for money? Brieflyexplain.
m) Considering the portfolio theories and givenFigure 1 that shows the stock price in Canada. Doyou think that the demand for money will decrease or increase?Why?
n) Following the COVID-19 shock, the Bank ofCanada announced that they want to purchase the government’s bondsin the secondary market. Given the function of the supply of money(M=cr + 1cr + rr B) and considering your answer for parth, do you think that the supply of moneywill increase/decrease/or uncertain? How? Explain your answerbriefly.
