Problem 5

(a)Differentiate between the development of the Global Financial Crisis and the Great Depression. Discuss how the different government policy approaches contributed to the length and severity of each event.(4 marks)

(b)Consider the impact of the COVID-19 crisis on economies around the world and assume our economy began the period at its natural rate of output.

(i)Using the Phillips Curve analysis, illustrate the impact of the crisis, identifying its new position as point A.(0.5 mark)

(ii) As a result of the crisis, would the output ratio for this economy be equal to 100%, above 100% or below 100%?(0.5 mark)

(iii)Explain how this economy will automatically return to its long-run position at the natural rate of output.(1 mark)

(iv)If the government's policy focus is on stabilisation, rather than waiting for automatic adjustment, what action would it undertake and how would this be illustrated on the Phillips Curve?(1 mark)

(v)Discuss how the crisis could also impact on the supply side of the economy. If this happens, what will be the impact on the Phillips curve? What can the government do to return the economy to its natural rate? What is the consequence of this policy action?(3 marks)