The text book: Robert H. Frank, Ben S. Bernanke, Kate Antonovics, Ori Heffetz - Principles Of Economics 7

Answer this question using the concepts discussed in Textbook Ch. 27 and assume that, initially, the economy is in its long run equilibrium.

“The global economy will contract by 3% this year as countries around the world shrink at the fastest pace in decades, the International Monetary Fund says. The IMF described the global decline as the worst since the Great Depression of the 1930s. It said the pandemic had plunged the world into a “crisis like no other” (BBC News 14 April 2020).”

(a) With reference to the news above and with the help of an aggregate demand-supply diagram, briefly explain how the Coronavirus pandemic may reduce equilibrium global output in the short run.

“The plunge (of crude oil price) started after Russia rejected a proposal by OPEC to cut its crude oil production by 1.5 million barrels a day. In apparent retaliation, Saudi Arabia cut prices for buyers over the weekend (nbcnews March 10, 2020)”

(b) With the help of an aggregate demand-supply diagram, briefly explain how a sudden crude oil price plunge may affect equilibrium global output in the short run.

(c) With references to the two pieces of news above and assuming that the prediction of IMF is correct, briefly explain how the Coronavirus pandemic and crude oil price plunge may affect equilibrium inflation rate and global output in the short run and the long run. Please illustrate your answer with aggregate demand-supply diagrams.

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A COVID pandemic may decrease output in the short run The COVID pandemic has influenced the world economy in a huge manner The pandemic has numerous production lines and firms shut down subsequently c... View the full answer