COVID-19 has significantly affected the stock market. Think of our typical closed economy IS-LM model. (a) How
Question:
COVID-19 has significantly affected the stock market. Think of our typical closed economy IS-LM model.
(a) How have stock prices responded to COVID-19? (Even if you have not read the news, how do you think stock prices would respond to such news?)
(b) What component of AD (i.e. C, I, G) is mostly influenced by such a response of the stock prices, and in what direction? How will this affect the IS curve? Show graphically. What happens to equilibrium r and Y?
(c) How is business confidence affected by COVID-19? What components of AD will be affected by this change in business confidence and how? How will this affect the IS curve? Show graphically. What happens to equilibrium r and Y?
(d) Would you agree that the economy is heading towards a possible recession or a boom as a result of the recent developments? What should the Fed do to alleviate the situation? If the Fed intervenes as you suggested, would LM move to the left/right? What impact would this have on r and Y?
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young