Q3

According to a recent publication of a leading financial institution based in the United States of America, on "How COVID-19 Is Breaking the Typical Business Cycle"^[1] ...the second quarter plunge and rebound of the US economy was expected.

Consider the following points below and state how you think each of the factors might impact the movement of the business cycle and use appropriate diagrams to depict your responses for each of the parts below

a)The economy faced a sharp contraction in the second quarter due to COVID-19 and in the third quarter, Government in the US delivered a timely and necessary fiscal and monetary relief package to promote a swift recovery

b)Businesses began to adapt to the changing household behavior as the economy reopened and the aggregate demand increased to help consumer confidence

c)Investors continued to be positive that the pandemic's uncertainty would soon settle down and employment and production would boost revenues to improve economic growth and the business cycle would continue in a positive direction

[1] https://www.jpmorgan.com/commercial-banking/insights/how-covid-19-is-breaking-typical-business-cycle

Economists and businesses believe that the second wave of the Covid-19 pandemic would affect the country's economic pillars-export, investment and private consumption-severely, as the tenure of the wave is likely to be longer.

Some of the major trading partners of Bangladesh (mainly the European countries) have reintroduced either lockdowns or equivalent steps amid rising virus infections and deaths. These countries have already squeezed overall supply and demand due to the impact of the second wave of the pandemic, resulting in an adverse impact on Bangladesh's export and investment.

The second wave has already reduced the export orders of the readymade garment sector by 30%. Zahid Hussain, former lead economist of the World Bank Dhaka office recently commented "Export, investment and private consumption sectors will ... be affected severely very soon as the consumers' confidence is reducing gradually."

a)With regard to the above excerpt, how do you think the real wage rate and the real GDP of the Bangladesh economy will be affected? Explain and Illustrate your answer with an appropriate diagram.

b)Based on the above, how do you think the AD-AS model would change AND mention the kind of output gap that the economy might experience?

c)To help stabilise the economy, Bangladesh government has already been providing million-dollar stimulus packages to its booming industries in the midst of the pandemic. It is also necessary for the government to channel funds and stimulus packages to the country's effective and productive sectors. Explain briefly and list the areas in which the government should invest to increase the economy's productivity and the potential GDP.