Macroeconomics Case Solution
Long term impact of demand shock on output
The impact of the lock-downs on the economy was greater than the initial shock, but the effects were limited. Nevertheless, the overall demand shock caused by the COVID-19 disruptions was much larger than the typical supply shock. Not only did affected workers lose their jobs, but all consumers reduced their spending. This created a huge economic shock, and policy makers are scrambling to limit the damage.
The government should focus its economic policy on a broader basis. The long term effect of demand shock on output due to COVID-19 lock-downs will depend on whether the economy is resilient to the lock-down. Its recovery rate should depend on the recovery of COVID-19 and its induced conditions. The government should ensure the availability of resources to support employment and maintain the economic growth in order to keep the price low.
Question-1: Part B
Short term impact of price and demand shock on inflation
The basic AS-AD model is a misleading one. During an ordinary recession, prices move in tandem and are induced by supply-side factors. In contrast, the Covid-19 crisis affected different sectors. While some sectors cut prices and increased output, other sectors raised prices. Hence, the prices of different industries are affected in different ways. This makes the long-term impact of the price shock on inflation a false conclusion
The most likely short-term effect of a price and demand shock on in due to COVID-19 lock-downs is lower output. This is because the price and supply shock will be greater. But the first-order reduction will be larger. For example, the impact of a supply shock will be more acute than that of a demand shock, and the second-order effect will be greater.
A prolonged recession would be different from a typical V-shaped recovery. Moreover, the increased risk of unemployment could increase the marginal propensity to consume, which would further increase precautionary saving preferences. We find evidence of this shift in a pandemic period, so it is possible for the economy to move towards an equilibrium with greater uncertainty. This new equilibrium would be associated with slower economic growth.
Long term impact of price and demand shock on output
Several uncertainty factors influence the calculation of the long-term impact of price and demand on output due to COVID-19. The Congressional Budget Office (CBO) estimated that 30 percent of workers in each sector would become sick, lose three weeks of work, and die. The CBO assumed that the mortality rate was 2.5 percent. Moreover, there are large uncertainties in the ascertainment rate (the proportion of confirmed cases) of the disease, making it impossible to estimate its impact.
The long-term impact of price and demand on output due to the Covid-19 is not yet well understood. It is not clear whether it is a temporary or a permanent phenomenon. However, firms differentially exposed to the virus will exhibit similar dynamics in planned price changes up to March 2020. The onset of the public health measures will cause a significant decrease in the price of many goods and services.
The COVID-19 crisis has multiple layers and is of unprecedented scale, compared to the financial crisis that hit the world in 2008-2009. It generates both supply-side and demand-side shocks that are similar in magnitude. This is because most public health measures in Germany occurred in March 2020, including a nationwide curfew on 13 March. Additionally, the COVID-19 crisis challenges the definition of the term “inflation” and the concept of a market’s inflation.
Question-1: Part C
While the COVID-19 model does not predict specific time periods, it does show the long-term dynamics of COVID-19 in the German labor market. The key to understanding the implications of the underlying shocks is to consider the type of firms differentially exposed to the crisis. The CBO research suggests that the price and demand shock will impact the same sectors.
The analysis has identified a number of long-term impacts. The first month of the lock-down was the most severe, resulting in a large decline in total private employment across all sectors. The second month, April 2020, was the most productive, but the first three months had the largest impact on total private employment. For the first month of the COVID-19 lockdown, the total effect was much more significant in the entire year.
The COVID-19 crisis began as a supply-side shock, but has now morphed into a demand-side shock. The high levels of uncertainty and the tightened restrictions on production are the biggest long-term consequences of the COVID-19 crisis. Further, the economic effects of the COVID-19 outbreak may be temporary and will be temporary.
Question-2: Part A
The French government has announced a new scheme to cover workers who do not receive assistance. Under the new scheme, all employees with a contract can be eligible for 70% of their gross wage. The changes will not affect the working hours of the employees. Moreover, the new system will also provide health coverage for 80% of their gross wages. While not all unions supported the recent demonstrations, the new scheme is likely to be beneficial for workers.
The French elimination of labor restrictions in 2006 could have a fundamental effect on French labor relations. It has the potential to radically reshape the country’s unemployment insurance strategy. The French government has always had a low level of trade union membership, and the rate in France has dropped below 10 percent from its 1979 peak. This is even lower than the current US rate of 14 percent. So, the French government’s new laws will have a profound effect on how French workers are paid.
The new legislation has raised the profile of French labor unions. Companies must negotiate with a local union or the main syndicate representative. The new legislation has also raised the profile of French labor unions. The French trade unions will benefit from this change. The new rules will help workers and employers to negotiate. But this is not a complete solution. Ultimately, the new law is designed to be more flexible and allow the labor movement to develop in France……………………………..
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