Question 2 (15 marks)

"Americans could get a check for $1,000 or more in the coming weeks, as political leaders coalesce around a dramatic plan to try to prevent a worse recession and protect people from going bankrupt (The Washington Post March 18, 2020)".

a. With the help of an aggregate demand-supply diagram, briefly explain how the U.S. policy mentioned in the above news could help prevent a recession.(8 marks)

"Another 6.6 million people filed for unemployment benefits last week, according to the US Department of Labor, as American workers continue to suffer from devastating job losses, furloughs and reduced hours during the coronavirus pandemic (CNN Business April 9, 2020)".

b. Briefly explain how the unemployment benefits scheme can act as an automatic stabilizer in the U.S. economy.(7 marks)

Question 3 (25 marks)

The following equations describe the economy in Country A in 2019.

ConsumptionC = 1000 + 0.6Yd - 400r

InvestmentI = 250 - 500r

Government spendingG = 500

ExportsX = 1500

ImportsM = 500 + 0.4Y

Income tax ratet = 0.2

Money demandMd = 1000 - 250i

Money supplyMs = 985

Expected inflation ratee = 0.05

where Yd is disposable income, i is nominal interest rate, and r is the real interest rate.

a. What is the equilibrium nominal interest rate in Country A in 2019? Explain your calculations.(5 marks)

b. What is the equilibrium real interest rate in Country A in 2019? Explain your calculations.(3 marks)

c. What is the equilibrium output in Country A in 2019? Explain your calculations.

(7 marks)

d. The final term in the equation describing investment, 500r, implies that a 1 percent (0.01) increase in the real interest rate reduces investment spending by 500(0.01) = 5 units. Similarly, the final term in the equation describing consumption, 400r, implies that a 1 percent (0.01) increase in the real interest rate reduces consumption spending by 400(0.01) = 4 units.

Briefly explain how the effectiveness of a monetary policy depends on the responsiveness of planned investment towards changes in real interest rate as well as on the responsiveness of consumption spending towards changes in real interest rate.

(10 marks)

Question 4 (25 marks)

"Dairy farmers have faced a crash in milk prices amid thecoronavirus pandemicin the last month when restaurants, workplaces and schools shuttered across the country. Many dairy operations have even dumped their cows' milk as the initial splash of at-home consumption has tapered off and the restaurant industry has nearly disappeared (nbcnews April 14, 2020)".

a. With reference to the news quoted above and with the help of a demand-supply diagram, briefly explain why price of milk drops.(8 marks)

b. Butter is a by-product in the production of milk. With reference to the news quoted above and with the help of a demand-supply diagram, briefly explain how thecoronavirus pandemicmay affect the market equilibrium price and quantity of butter.

(7 marks)

c. If you were a dairy farmer, should you shut down your production of milk during thecoronavirus pandemic? Please briefly explain your answer.(10 marks)