N5

The focus of this question is on the Sri Lankan economy during the period from 2020 to 2022.

16) The following two shocks occurred in the economy during this period.

i. As a result of the COVID-19 pandemic, Sri Lanka's tourism industry crashed. Tourism had traditionally been a major engine for economic growth in the country.

ii. Due to a plummeting foreign currency reserve, Sri Lanka faced mounting difficulties to import fuel (i.e., diesel and petrol). A fuel crisis ensued, with prices of petrol and diesel surging by more than double. In Sri Lanka, fuel is needed not only for transportation but also for electricity generation.

Required:

c) Explain clearly in words how the key macroeconomic variables (i.e., average price level, inflation rate, Real GDP and unemployment rate) will be affected by the shock above.