COVID Flashcards
The pandemic triggered the deepest global recession since the Great Depression, as many countries experienced a sharp contraction in economic activity. Global GDP shrank, unemployment rates soared, and many industries, especially travel, hospitality, and retail, were severely affected by lockdowns, social distancing, and reduced consumer demand.
Reason:
Supply and Demand Shocks: The pandemic caused simultaneous supply and demand shocks. On the supply side, businesses had to close, supply chains were disrupted, and labor markets were hit hard by illness and lockdowns. On the demand side, consumers reduced spending due to uncertainty, job losses, and lockdown restrictions.
Government Restrictions: Governments imposed lockdowns and travel restrictions to slow the spread of the virus, which shut down businesses, especially those in the service sector.
Economic Theory:
This aligns with negative supply-side shocks and demand-side shocks, leading to economic contraction. Governments responded by introducing stimulus packages, subsidies, and other fiscal measures to mitigate the impact.
Central banks worldwide, including the Bank of England and the U.S. Federal Reserve, slashed interest rates to near-zero levels and introduced large-scale quantitative easing (QE) measures to stabilize economies during the pandemic.
Liquidity Crisis: With businesses and households facing a shortage of liquidity, central banks aimed to inject money into the economy to encourage borrowing, investment, and consumer spending. Lower interest rates made loans cheaper and stimulated demand.
Preventing a Financial Collapse: The pandemic led to panic in financial markets, and central banks used QE to purchase government bonds and corporate debt, increasing the money supply and ensuring liquidity in the financial system.
Economic Theory:
Monetary Policy: This is a classic example of expansionary monetary policy used to combat a recession and prevent deflation. By lowering interest rates and increasing the money supply, central banks hoped to stimulate investment, consumption, and restore confidence.
COVID-19 led to significant disruptions in global supply chains. Factory shutdowns, shortages of workers, and the blockage of major shipping routes (e.g., the Suez Canal blockage in 2021) contributed to delays, shortages, and increased costs for goods across various industries.
Reason:
Lockdowns and Factory Closures: Factory shutdowns in key manufacturing hubs (e.g., China, Southeast Asia) during the early stages of the pandemic disrupted the production of goods. When countries tried to reopen, they faced shortages of key components (like semiconductors), leading to supply bottlenecks.
Labor Shortages: The pandemic caused worker shortages, particularly in logistics and transportation (e.g., truck drivers, port workers), exacerbating delays and further pushing up costs.
Economic Theory:
Cost-Push Inflation: Disruptions in the supply of goods, particularly essential components, contributed to higher production costs for firms, which were then passed on to consumers in the form of higher prices.
Globalization & Interdependence: This illustrated how interconnected global supply chains are, highlighting the vulnerability of the global economy to localized disruptions.
Event:
Inflationary pressures increased significantly in 2021 and 2022, particularly in developed economies like the U.S., the UK, and the Eurozone. In 2023, inflation remained elevated, although it was somewhat reduced from its peak in 2022.
Reason:
Demand-Pull Inflation: Governments injected substantial fiscal stimulus into the economy to support households and businesses during lockdowns, increasing aggregate demand as economies started to recover.
Cost-Push Inflation: The ongoing supply chain issues, rising energy prices (especially post-Ukraine war in 2022), and labor shortages contributed to higher production costs.
Energy Crisis (2022): Following Russia’s invasion of Ukraine, energy prices surged globally, particularly natural gas and oil, which drove up overall price levels in many countries.
Economic Theory:
Inflation and Monetary Policy: Central banks were faced with the dilemma of combating inflation with interest rate hikes while not stifling the recovery process.
Phillips Curve: The trade-off between inflation and unemployment became evident, as many economies faced high inflation alongside recovering, but still fragile, labor markets.
