Question

Question 2: (50 marks] The COVID-19 pandemic is causing tremendous hardship around the world. A recession, likely a severe one, is inevitable. A. Show the short run effects of a decrease in the demand for goods and services caused by the pandemic. Suppose the economy is an open economy that is on a flexible exchange rate. To answer this question, draw the following five diagrams: 1. The goods market, [3 marks] 2. The money market, [3 marks] 3. The IS-LM curves, [3 marks] 4. The interest parity condition, and [3 marks] 5. The AS-AD curves. [3 marks] Clearly label the initial and new equilibrium points in each diagram. Provide brief explanations for the changes. [5 marks]

Answer 1

920 is Y Y I Roods Yi Market ILM Money Morkel inlaust vali he Ye ( IS-LM curve Ex2 Exchange rate interest parity SRAS, ADI HADO Y AS AD clone Due to COMID-19 pandemic, the subbly of goods will be affected. So Veguilibriuam comme will shift to the left. 10 12 13 4 17 18 19 5124 25 26 27 2 JAN 2021 DAS &

. From Muendel- flemming [ Interest - Parily the exchange rate will fall [ Depreciation) At the lower income, the AD Curve will shift to the left. So the economy will plunge into 11 recessione a INOM 26