week 9: covid-19 economic damage

Question 1

The pandemic caused __________, with an unprecedented ______ in GDP during the first national lockdown in 2020.

Answer 1

The pandemic caused a severe recession, with an unprecedented drop in GDP during the first national lockdown in 2020.

Question 2

During COVID, In face of negative income shocks, one of the ** first ** and strongest responses of households with high MPC was to —?

Answer 2

to postpone vehicle purchases.

Question 3

Increase in uncertainty is likely to have a similar effect that works via a ________________

Answer 3

precautionary motive

Question 4

There were ___________ in the ______ and ______ industry

Answer 4

There were **large declines ** in the restaurant and travel industry

Question 5

There were _____ __________ across the supply chain

Answer 5

Many disruptions

Question 6

Examples of externalities due to COVID 19 recession ?

Answer 6

1. Non-COVID19 patients crowded out in intensive care unit
2. Social distance for high-risk individuals requires provision of services to them: food, medicine etc.

Will the market provide these services efficiently?

3. Congestion problem for online food delivery services
4. Pollution levels decline in the short-run

Question 7

What were the industries most affected by COVID?

Answer 7

Airlines!!!!!!!!!
Automobiles
Energy Equipment & Services
Hotels
Restaurants & Leisure
Specialty Retail.

But all sectors were impacted

Question 8

In production networks, there are own, downstream, and upstream effects. What are the differences?

Answer 8

Own effects stem from shocks within the same sector, while downstream effects travel from suppliers to the focal sector and upstream effects move from customers to the focal sector.

For instance, a productivity shock in the steel industry affects the downstream automotive industry, while reduced government car purchases impact the steel industry upstream.

Question 9

Spillover effects, which are significant compared to own effects, occur for _____ shocks.

Answer 9

both types of

Question 10

what are transmission channels?

Answer 10

Transmission channels are the pathways through which changes in one part of the economy influence other parts.

Question 11

What are the transmission channels we talk about in relation to COVID-19?

Answer 11

transmission of the COVID-19 pandemic’s economic effects within a country

Question 12

Transmission of COVID-19s economic effects were the transmission of two types of sector level shocks, these were?

Answer 12

1. A supply shock - proxied by changes in Total Factor Productivity (TFP). A supply shock occurs when there are disruptions in the production process, such as supply chain disruptions or labor shortages, leading to changes in the efficiency of production within sectors.
2. A demand shock, captured by changes in sectoral government spending. A demand shock occurs when there are changes in consumer demand for goods and services, which can be influenced by factors such as government policies, economic conditions, or public health measures.

Question 13

Was covid-19 a demand or a supply shock?

Answer 13

at first, covid-19 may look like a supply shock

THEN, demand effects materialise:

Question 14

Why did COVID-19 first resemble a supply shock?

Answer 14

There were:

1☆. Disruption in global supply chains

2☆. Quarantine and social distancing worldwide decreased labour supply

Question 15

Why was the COVID19 Pandemic supply shock different from previous crises?

Answer 15

In the Great recession 2007-9 : the origin of supply shock was in the financial sector

War/natural disaster : origin of supply shock is destruction of infrastructure of large-scale permanent loss in labour force

Question 16

What was the feedback loop into supply?

Answer 16

firms (esp. those more dependant on cash flows) lack liquidity to fulfil commitments while facing lower demand and so

are forced to file for bankruptcies

Question 17

Differences between demand in covid and other crises?

Answer 17

→ demand and supply loop similar to financial crisis - though uncertainty is about the disease

→ different from war/disaster - demand may increase as gov redirect war efforts toward fighting or rebuilding and so potentially inflationary

Question 18

What does a negative feedback loop in supply look like on diagram?

Answer 18

AS shifts left twice

Question 19

reasons for demand shock?

Answer 19

• uncertainty about progress of disease
• uncertainty about economic policies that alleviate
• non-perm workers lose income, particularly in affected industries
• households inc precautionary savings
• firms wary of investing til situation clears; also lack liquidity to do so

Question 20

What was the feedback loop into demand?

Answer 20

Workers who lose jobs from closing business:

→ no longer have income
→ lower consumption
→ depresses AD

Question 21

Explain how covid-19 is not just a large shock on real economic fundamentals, but also a shock on the frictionless of the market

Answer 21

The COVID-19 pandemic has not only disrupted real economic fundamentals but has also severely impacted the smooth functioning of markets. It has created a barrier between supply and demand, with a chain reaction of contraction in both sectors. When supply decreases due to factors like lockdowns and disruptions, demand subsequently falls as consumers have limited access to goods and services. This reduction in demand further suppresses supply as businesses scale back production in response to lower demand. This continuous cycle of contraction has led to significant destruction of economic surplus, posing substantial challenges for economic recovery.

Question 22

Draw the large destruction of economic surplus from COVID19

Answer 22

contraction in supply → leads to contraction in demand → contraction supply……

…large destruction of economic surplus

Question 23

What happens if we flatten the epidemic curve?

Answer 23

There is a short-run trade-off between flattening the epidemic curve and the size of the recession,

Slowing down the peak of infections is likely to prolong the time that the economy is not at full capacity

Question 24

Flattening recession curve involves …?

Answer 24

Flattening recession curve involves considering externalities and long-term impact of temporary economic disruptions.

Temporary drop in economic activities: 50% reduction for 1 month, followed by 25% decrease for 2 months.

This scenario still results in nearly 10% decline in GDP.

Extending lockdowns may lead to downward spiral in supply and demand, pushing actual costs beyond 15% of GDP.
Output loss from COVID-19 likely to be permanent, unlike recovery after Great Recession.
Global recession in advanced economies inevitable; China also facing possible recession in 2020Q2.

Question 25

Explain, in COVID19, how individually rational decisions can cause a catastrophic chain reaction:

Answer 25

1. consumers not spending due to self-isolation
2. firms cut costs + reduce workers, default on loans and suppliers
3. banks w non-performing loans will cut lending

Question 26

for health, isolation has _______ externalities

for economy, isolation has ________ externalities

Answer 26

for health, isolation has **positive ** externalities

for economy, isolation has negative externalities

Question 27

Diagram of flattening recession curve

Answer 27

Question 28

DIRECT + INDIRECT EFFECTS of COVID19 ON THE ECONOMY

Answer 28

round 1: S-S disruptions + large death toll generates heightened uncertainty and panic for hholds + businesses

round 2: more uncertainty + panic → drop in consumption and investment

round 3: large drop in demand dries up corporate cashflows, triggering firms’ bankruptcies

round 4: layoffs and exiting firms generate sharp rise in unemployment

round 5: labour income fall significantly and non-performing loans spike up → weakens demand → increases uncertainty further

• back to round 2 for another loop!

Question 29

Major ______________ associated w suppression strategy to solve health crisis.

Answer 29

macroeconomic cost

Question 30

What were the macroeconomic objectives of the COVID pandemic? [4]

Answer 30

1. ensure households delay mortgage/rental payments and have cash-on-hands
2. ensure workers receive pay checks even in quarantine or if temporarily laid off
3. ensure firms have enough cash flows — to pay workers and suppliers, especially small/young businesses — and can avoid bankruptcy
4. support financial system to avoid health crisis becoming a financial crisis

Question 31

What macroeconomic policies were used? [4]

Answer 31

1. government spending on public health sector
2. tax relieves, tax cuts, tax holidays, tax incentives
3. tax rebates and temporary universal income to households; cash grants to firms
4. cut interest rates, launch QE programmes and lending schemes

Question 32

What would be the macroeconomic policy most likely to stop immediate economic collapse?

Answer 32

tax rebates and temporary universal income to households; cash grants to firms

Question 33

During covid-19, debt was attractive given the ultra-low interest rates… but guaranteed by whom? Explain

Answer 33

Debt is appealing right now because interest rates are very low. This means it’s less expensive to borrow money, making it easier to manage the debt.

But who is taking responsibility for the repayment of a loan? (guaranteeing debt)

Question 34

How able are countries to guarantee their debt?

Answer 34

UK/US governments have sufficient credibility to afford it without too much sovereign risk but would still require coordination with the central bank…

but ITALY cannot - they lack both gov. credibility and independent national central bank.

— not really an Italian problem, the timing is just different

Question 35

Across countries, how efficient were government policies in response to the pandemic?

Answer 35

• the short-term gov responses to the pandemic were extraordinarily swift and encompassing;
• governments embraced many policy tools that were either entirely unprecedented to had never been used on this scale in emerging economies:

Question 36

What were the 3 main policies to combat COVID-19 by governments?

Answer 36

1. LARGE DIRECT INCOME SUPPORT MEASURES
2. DEBT MORATORIA
3. ASSET PURCHASE PROGRAMS

Question 37

What was the size of impact of these policies in HICs vs LICS?

Answer 37

these programs varied widely in size + scope

☆ Many LIC were struggling to mobilise resources given limited access to credit markets + high pre-crisis levels of gov debt.

☆ Therefore, the size of fiscal response to crisis as a share of GDP was almost uniformly large in HICs and uniformly small or non-existent in LICs

Question 38

In middle-income countries, the fiscal response _______ __________, reflecting marked differences in the ability + willingness of governments to spend on support programs.

Answer 38

varied substantially

Question 39

What impacted the combination of policies chosen by countries?

Answer 39

The combination of policies chosen to confront short-term impacts differed significantly across countries,

Depending on availability of resources + the specific nature of risks the countries faced

Question 40

in addition to direct income support programs, govs + central banks made unprecedented use of policies intended to provide ________

Answer 40

temporary debt relief, including debt moratoria for houses and business

Question 41

Although these 3 programs mitigated short-term liquidity issues faced by households / businesses, they had _________ _____________…

Answer 41

They also had unintended consequence of obscuring the true financial condition of borrowers,

Creating a NEW PROBLEM:

☆ lack of transparency ab the true extent of credit risk in the economy ☆

Question 42

Policy implications stemming from the COVID-19 crisis include:

Answer 42

★ While the extensive crisis response was crucial in lessening its severity, it resulted in a global surge in government debt, raising worries about debt sustainability. This exacerbated the gap between emerging and advanced economies.

★ In 2020, 51 countries, including 44 emerging economies, saw a downgrade in their government debt risk ratings.