Question
The COVID-19 pandemic in 2020 had devastating effects on Mexico's economy, as in many other countries. Mexican households' experienced significant restrictions in their access to
The COVID-19 pandemic in 2020 had devastating effects on Mexico's economy, as in many other countries. Mexican households' experienced significant restrictions in their access to many consumption goods and services. This meant that as a result of the pandemic, consumption expenditure had sharply declined for every given level of household real income and wealth. Furthermore, the prospects of reduced demand and production difficulties under pandemic conditions discouraged investment in the country. As a result, investment declined for every given rate of interest. These changes, however, did not change the price level, the next export function, or the propensity to hold money. Assume that the pandemic effects and any policy responses to them were all viewed as temporary by the households and firms. Also, assume that the interest parity condition held and money and product markets reached equilibrium in 2020. Finally, treat the conditions and policies in the rest of the world as given.
a) If there had been no policy response to the pandemic, what would have happened to the aggregate preferred expenditure curve (D curve) of Mexico's economy in 2020? Why?
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