a) Suppose the COVID crisis and lockdown has caused a temporary 40% fall in the demand for labour in the economy. Suppose that the Supply of labour has not changed. As this shock is expected to be temporary, there is very strong downward wage rigidity in the economy. Using the Labour Market and Production Function model, argue why we expect output to fall by less than 40%.

b) Suppose we have the shock as in part (a) but the fall in demand for labour is now recognised as permanent. This removes the downward wage rigidity. What effect does the removal of downward wage rigidity have on aggregate output?

c) Assume the economy is as in part (b). That is, 40% drop in Demand for Labour, and no downward wage rigidity. Would higher inflation have an impact on real output? Explain your reasoning (as always).

d) Give possible reasons why the usual CPI measure may not be a good measure of the cost-of-living for consumers during COVID.

e) Given your experience of COVID, would you expect inflation to be higher than expected over this period, or lower than expected? Why do you think this? f) What kinds of policies might be employed by the Central Bank to help increase output? Why might these policies be effective?