Question 1

A recent article published by the Federal Reserve (the central bank of the USA), suggests "the massive lockdown of the economy" has led to "a large negative demand shock. However, an accompanying increase in unemployment benefits has increased the income of some low- and middle-income households at least temporarily, which could helpfully support aggregate demand". The excerpt above suggests an increase in household income, which might lead to improved aggregate demand.

a. Draw a diagram to explain the above situation to show the impact of increased income and how it affects aggregate demand

The article further states that "...supply chains in a number of industries have been affected not only internationally, with international trade in general greatly reduced, but also domestically, resulting in price increases for many goods and services".

b. In your opinion if prices of goods and services increase, what might be the impact on the aggregate supply of goods and services? Explain your response in words and with the help of a diagram.

c. Given the above scenario, how might the aggregate demand change in response to a decrease in exports. Explain your response in words and with the help of a diagram.

The paper also proposes that.... "with increased unemployment benefits some workers may experience greater income staying at home rather than returning to work. This situation may have positive effects on public health by supporting social distancing, but it may also further complicate the process of business re-openings".

d. Consider the subsidies and incentives that Bangladesh's government has provided to the local businesses and the initiative to provide vaccines to the eligible citizens, what might be the expected impact on the workers' health and labor productivity?

e. How might the initiative impact the aggregate supply of the labor force and the aggregate demand of households and investors?

Question 2

On 20 April 2021, the Government of Bangladesh announced an additional BDT 105 million allocation as relief for people affected by the lockdown in the country. This brings the total government disbursement of COVID-19 related payments to low-income families to around BDT 9.3 billion. Most of these allocations have been made directly into the accounts of the low-income families via money-transfer apps such as bKash, Nagad, etc. Keep in mind that while the lockdown is in effect, many people cannot work. This means that output of the economy is at a low level.

a. Using a diagram, explain what effect these transfers will have on the loanable funds market.

b. Do you expect the effect of these transfers on the loanable funds market to be large or small? Explain.

c. Explain the effect of the lockdown on price-level and output of the economy. Illustrate using a diagram. How do these transfers change the scenario?