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ECON 248v9 Exam Alternative Assignment

This assignment, which replaces your invigilated final exam, has a total of 100 marks and is worth 50% of your total grade for this course. You should complete it after completing all the units in ECON 248. Answer each question clearly and concisely, using the economic theories or concepts you learned in the course.

You will have one day (24-hours) to complete this assignment. Ensure that you return your completed assignment within 24 hours (sending via email will create a time stamp) to meet this requirement.

The answer for each question should be one- to one-and-a-half pages, completed in a 12-point font and double-spaced (300-500 words).

Guiding Scenario

Since the beginning of 2020, countries around the world have been grappling with the effects of COVID-19, a highly infectious disease caused by a newly discovered coronavirus, for which there is no treatment and no vaccine. The COVID-19 pandemic has prompted mass social distancing measures, with widespread economic impacts. As the global oil demand crumbles and OPEC's oil price war continues, oil-producing and oil-exporting countries also face a second economic challenge of low oil prices.

Country X is facing the economic impacts of both COVID-19 and low oil prices for its oil exports. Use the relevant economic theories and concepts in ECON 248 to answer the questions below.

Questions

1. How is COVID-19 expected to affect the aggregate demand of Country X? Assuming that other factors remain constant, what can be expected to happen to the country's equilibrium price level and income? (20 marks)

COVID-19 has changed the world significantly. Countries going to lock-down for minimum of 14 days to a month, closing nonessential businesses, restrictions on travels and restrictions to several activities for the day to day has taken a toll on the businesses. These resulted in the contraction of the economy. The closing of nonessential manufacturing and nationwide lock downs resulted to significant loss of sales and income to businesses which resulted to a decrease in demand. During pandemic, people have no income due to loss of jobs or are in limited income, these results to a decrease in demand as people will only buy what they deemed as essential. The situation of low demand leaves an oversupply and consequently the equilibrium price declines as the income level also declines. Supposed, the economy of country X was in the Long Run equilibrium, but due to the lockdowns, restrictions and closure of nonessential businesses, aggregate demand decreases, then this leads to a decrease in the level of prices and GDP. The decrease on Aggregate demand shifts the curve to the left or downward. This decrease in aggregate demand leads to decrease in price level and the real GDP decreases moving to the left. Now we have recessionary gap.

Country X was struggling during the pandemic, but when the restrictions were slowly being lifted and some businesses started to open to limited capacity, demand will increases and the price will increase again.

An example for this was the gas during the lock down from $1.20 it went down to .68 cents per litter, which was the lowest drop since the 1980's. It was the effect of not a lot of people travelling for work, no tourism, only essential businesses open and only the essential workers are traveling and so there is a significant decrease in the demand of gas. After some restrictions were lifted, the demand increases, but the supply was low due to manufacturers needs to cope up from their closure or the shipments were delayed due to border restrictions. This time the gas is at all time high of $1.35 per litter higher than the pre-pandemic price.

2. How is the fall in global oil demand expected to affect the aggregate demand of Country X? Assuming that other factors remain constant, what can be expected to happen to the country's equilibrium price level and income? (20 marks)

When the global demand for oil decreases then this will lead to a decrease in the aggregate demand of the oil exporter country X. Due to lock downs many manufacturing firms have closed, there were less travelling from people due to job loss and the restrictions there was a significant decrease on the demand of the crude oil and its derivatives. Countries all over the world had their lock downs all at the same time, it's like the world suddenly stopped in minimum of 14 days to almost more than a month, in some cases up to three months. When there is no demand, the oil that was imported by the countries were not being used, then these countries will not import another shipment of oil.

In the short run, the aggregate demand shifts to the left. We notice that the new equilibrium moved that the real GDP is lower than the potential GDP, and the price level has decreased. This is what we call inflation. In the Long run, with low price levels, firms would want to decrease the money wage rate of the workers. The aggregate supply shifts to the right. The new equilibrium gives us back real GDP equal to potential GDP, but price level has decreased. In other words, we have deflation.

When importing countries realized the decreased price of oil, they will take advantage to it and order shipments. This will increase the demand of oil exported by the country X.

3. How is COVID-19 expected to affect the aggregate supply of Country X? Assuming that other factors remain constant, what can be expected to happen to the country's equilibrium price level and income? (20 marks)

Covid 19 is a combination of supply and demand shocks.Most economist called it the perfect storm. These shocks is evident through supply chains, causing multiple sectors to become demand-constrained or supply-constrained. As government mandates several restrictions to slow the spread of the outbreak, there was significant uncertainty on lives and livelihoods. The demand for specific sectors like the groceries and deliveries increased in the early phase of the pandemic, other sectors like tourism and travels demand had significantly decreased or stopped. People lost their jobs, and those who have a job has decreased their income due to less hours at work.

Aggregate supply is a relationship between quantity of real GDP and the price level. We know that the two factors than can shift the aggregate supply, the potential GDP and the Money wage rate. Aggregate supply depends on the quantity of labors employed, human and physical capital, and their technological level. Human and physical capacity, and technological level can be fixed in a specified time, but quantity of labour can vary.

The social distancing at work, has reduced the number of employees that can work at the same time, and can reduce the production. There are employees who got too sick who can not work, there are people who need to quarantine due to exposure, there are several people in the work force that died due to the pandemic. This affects the total output of the firms and the total production of the nation. Therefore, the supply has been constrained in certain aspects resulting to a shift to the left. With the supply shortages, the equilibrium price is likely to rise. However, since the supply emanates from investments and investments is constrained, the national income will decline. The GDP will decrease, firms will decrease their quantity of labor.

A special scenario can happen when a decrease in Aggregate supply results to temporary increase in price, the supply shifts to the left. The new equilibrium gives us an increase in price level, and we see that real GDP is lower than the potential GDP. This is a case of stagflation, where the economy is at recession and there is inflation. This is what most countries fear as it is becoming a threat to the global economy.

4. Use the AD-AS diagram (model) to show the net effects of COVID-19 on equilibrium price level and income in Country X. (20 marks)

The table shows the AD-AS curve of Country X. Due to Covid, government mandates lockdown and restrictions. This results to low demand since there was no or less income. The firms are in limited capacity since they have to reduce their employees and production to manage their cost. These results to decreased production, decreased supplied and decreased income for the firm. This affects the output of the nations resulting to a decrease in GDP.

5. What fiscal policy would you recommend to help minimize the economic effects of COVID-19? Use the AD-AS diagram to illustrate how your policy recommendations could be expected to affect the net effect of COVID-19 as you outlined for Question 4 above. (20 marks)

Expansionary fiscal policy can be used by the government to increase the aggregate demand. When using this policy, the government reduces the tax rates and increase the government spending which will lead to an increase in new job opportunities.When the income of the people increases, they have more money to spend and therefore the demands increase. This will shift the aggregate demand curve rightward (AD to AD1).When demands increases, the firms will increase their production by hiring more and increase their production capacity. On the supply side, when government will give tax exemptions, extended loan facilities to producers, this will increase the production of the firms. The aggregate supply will also rise, and the aggregate supply curve will shift to the right from AS to AS1. This will increase the total output of the country X from Y to Y1, and the price will almost be the same. With the rising investments and consumptions, the level of employment will rise, prices will rise and the equilibrium quantity will also rise.

I believe the transfer of payments like the CERB package had helped a lot of families who experienced a decrease in their income or who had lost their job. The six-month period when the conditions were not clear, a lot of people had benefited from it. The increased in the spending power of the people had increased the demand.Some essential businesses had seen opportunities for their growth, and they hired more people to cope with the demand. Stimulus packages were given by the federal for the small businesses. A reduction on interest rate had increased the quantity of loans available for the people and businesses to take. Majority of the lending companies offered to defer payments on their loans for up to 6 months to help the consumers. The federal offered to cover the training cost of those who lost their jobs to get a different career.