Question 4

In recent months, many countries round the world have relaxed lockdown restrictions imposed due to COVID-19. However, relaxations have been uneven, with many cross-border restrictions remaining in place affecting the efficiency of international supply chains for the production of goods. With an AD-AS graph for an economy originally in long-term equilibrium, answer the following questions.

Part (a)

Discuss, with the aid of well-illustrated and labelled AD-AS and money market diagrams, the short-term effect on output, unemployment, the general price level and interest rate.

Part (b)

Discuss, with the aid of an AD-AS diagram, what kind of monetary policy can be adopted to restore the economy to the full employment equilibrium. Will this policy create any other macroeconomic problems?

Part (c)

Suppose the problems discussed in part

(a) rely on the self-adjustment mechanism instead of the discretionary policy proposed in part

(b). Explain how the adjustment will be done.

Question 5

Suppose that the economy is experiencing a high unemployment rate and at the same time, inflation is quite high. How can the economy return to the natural rate of unemployment if policymakers also want to achieve low inflation? Will it be possible to achieve both in the short run?

Please answer this question with a well-illustrated diagram.