In 2020, the world economy entered sharp recession due to the covid-19 pandemic. Part (a) Assume initially before the pandemic an economy starts at the full employment equilibrium, discuss (with the aid of aggregate output market and money market diagrams) the short run effect of a decrease in demand for goods due to drop in consumption. Explain what will happen output, unemployment, the general price level and interest rate. Part (b) Discuss (with the aid of aggregate output market diagram) what kind of monetary policy can be adopted to restore the economy back to the full employment equilibrium. Part (c) Suppose instead of carrying out the action you described in part (b), the president of the central bank in this economy is convinced that there is no need for any monetary policy action. If his/her opinion is followed, then how will the problem you discussed in part (a) adjust by itself How will the economy go back to equilibrium in the long run? Explain in under 250 words whether you think the president's opinion is good for the citizens of this economy? Illustrate this self-adjustment on an aggregate output market diagram. |

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