The current coronavirus pandemic has brought about a major slump in aggregate demand in the Irish economy. Using your knowledge of the classical framework, represent this situation in the AS-AD and IS-LM models. Explain the short run implication and how you anticipate the economy will revert to its long run equilibrium. You are expected to make reference to the policies which are being pursued by both the central bank and the government.

The current coronavirus pandemic has brought about a major slump in aggregate demand in the Irish economy. Using your knowledge of the classical framework, represent this situation in the AS-AD and IS-LM models. Explain the short run implication and how you anticipate the economy will revert to its long run equilibrium. You are expected to make reference to the policies which are being pursued by both the central bank and the government.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The current coronavirus pandemic has brought about a major slump in aggregate demand in
the Irish economy. Using your knowledge of the classical framework, represent this situation
in the AS-AD and IS-LM models. Explain the short run implication and how you anticipate
the economy will revert to its long run equilibrium. You are expected to make reference to
the policies which are being pursued by both the central bank and the government.

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Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand – for example, a permanent fall in desired autonomous consumption at time t = 1. What are the effects of the shock on the equilibrium real wage in the short and in the medium run?
subquestions a and b. * for a) - need to find the IS equation, also the LM equation and the equilibrium.
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Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in…
Suppose that a given economy, in which the level of production (Y) is not at the natural level (Yn), an economy in which Y#Yn. 1) Using the AS/AD model, give an explanation of what will happen in the future and suggest a fiscal and/or a monetary policy to adjust the output and further analyse the effect of the suggested policy on employment and price level. 2) Illustrate your answer in part 1) by presenting and analysing data from the UK by identifying two occasions since 1950 (each covering a span of 2-5 years), where such an adjustment process occurred.
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