2)The pandemic has shaken the pillars of global economies and changed risks and conditions. On the one hand, the crisis increased the risk of severe deflationary spirals and output contractions for economies near the liquidity trap. On the other hand, adverse supply conditions changed deflationary pressures into inflationary spirals. Provide an analytical and graphical explanation of these developments and central banks' challenges in dealing with these risks and conditions. (40 marks) This task aims to assess your understanding of how being close to the ZLB created a risk of deflationary spirals (explain what a deflationary spiral is) when an adverse demand shock hit the system, a situation that arose in the first part of the pandemic (show this with a graph and back it with an equation). However, the pandemic was a shock to both AD and AS. The reaction to the negative shock to AD was quick. The use of substantial fiscal policy measures and massive and accommodationetary policy (large use of QEs) helped AD not to contract more and actually helped AD to start shifting back (with pent up demand after restrictions were lifted). As AD was improving, different waves of restrictions affected AS in different parts of the world. Thus, supply chain disruptions, increases in energy costs, changes in the labour force (with increases in inactivity) created a risk either of stagflation (explain briefly and illustrate with a graph) or of high inflation and sticky inflation low growth. Use graph equations and data to add rigour to your arguments. Explain the dilemma of CBs under this scenario (we discussed it during week 6: trade- off between combating inflation and damaging recovery). You may want to distinguish developed and developing economies (the latter ones with debts in dollars, difficulties to finance their deficit and debts, slow vaccination programmes etc)