SHORT TERM ECONOMIC FLUCTUATIONS Flashcards
The global outbreak of COVID-19 wreaked havoc on most economies. The containment efforts of the pandemic were proving to be detrimental to economic activity, leading many countries to relax the lockdown even when the objective of the containment was not reached.
a) How was labor demand affected by the pandemic? Show graphically and explain why
a) Labour demand shifted to the left. As firms had to organize differently, this became a negative productivity shock. Also, consumers did not spend as much as they would have and this was a negative demand shock.
The global outbreak of COVID-19 wreaked havoc on most economies. The containment efforts of the pandemic were proving to be detrimental to economic activity, leading many countries to relax the lockdown even when the objective of the containment was not reached.
c) How did an increase in government expenditures minimized the decrease of employment?
c) By increasing the demand for goods this led to an increase of product demand (with upward pressure on product prices. Either a product price increase or even with sticky prices, this pushes labour demand to the right and thus minimized employment losses.
The global outbreak of COVID-19 wreaked havoc on most economies. The containment efforts of the pandemic were proving to be detrimental to economic activity, leading many countries to relax the lockdown even when the objective of the containment was not reached.
b) What impact did this have on the unemployment rate? Show graphically and explain why.
b) With rigid wages, the impact on employment was greater than when wages are flexible. The unemployment rate increased more in that case.
Ldcovid will shift to the left (wage/employment graph with a slope vertical)
The global outbreak of COVID-19 wreaked havoc on most economies. The containment efforts of the pandemic were proving to be detrimental to economic activity, leading many countries to relax the lockdown even when the objective of the containment was not reached.
d) Why did the shock cause a greater decrease of wages in economies with flexible labour markets?
d) With rigid wages, the adjustment goes through an adjustment in quantity and in that case the adjustment in quantity is bigger with rigid wages. When wages are flexible, wages and employment adjust.
d) Suppose that businesses become more optimists, what impact will this have on wages, employment, and the unemployment rate in both cases?
Labour demand shifts to the right. For the flexible labour market, employment and wages increase and voluntary unemployment decreases. The unemployment rate goes down. For the labour market with rigid wages, only employment increases (by more than would be the case in a flexible labour market) and so involuntary unemployment decreases and the unemployment rate goes up.
T OR F : a) The S&P500 (stock market index) is a lagging indicator.
a) False. It is a leading indicator; it reflects expectations and views on the future
T OR F : b) A change in expectations can have a non-neglectable impact on GDP and employment.
b) True. Sentiments can change and lead to a decrease of autonomous investment and of autonomous consumption. This shifts AD to the left, there is a negative multiplier effet, Overall, both GDP and Employment go down.
T OR F : c) As aggregate demand increases, it is likely that the demand for funds will go down and real interest rates go up.
c) False. It is the opposite. Demand for funds will increase as demand shifts to the right. The real interest rate will then increase.
T OR F : d) If product prices can adjust in the short run, this will limit the multiplier impact of an increase of government expenditures.
d) True, when prices are sticky, we observe the full multiplier effect. Here higher prices reduce demand thus curtailing some of the multiplier effect.
If preferences change and consumers start spending less of their income on imported goods, what impact would this have on local employment?
This would increase the multiplier and thus increase AD. This increase in AD would lead to an increase of labour demand and so an increase of employment.
