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Homework answers / question archive / COVID-19 has resulted in many persons being unable to work and has led to a decrease in economic activity in the Caribbean and the rest of the world
COVID-19 has resulted in many persons being unable to work and has led to a decrease in
economic activity in the Caribbean and the rest of the world. (750 words maximum)
(a) Carefully explain and illustrate the effect of this decrease in economic activity on the
money market. (marks will be deducted for incorrect or incomplete labelling of
graphs)
(9 marks)
Identify ONE policy implemented by the government in your assigned Caribbean country to
deal with the decreased economic activity due to COVID-19. What was the aim of the
policy?
(b) On the same diagram in part (a), show and explain the impact of the policy
implemented in your assigned Caribbean country. (marks will be deducted for
incorrect or incomplete labelling of graphs)
(7 marks)
(c) Discuss two monetary policies that could be implemented by the central bank which
would have the same impact as the policy implemented by your assigned Caribbean
country.
(8 marks)
(d) Which of the three policies (from part b and c) do you think would be most
effective? Explain.
Answer:
Given that,
COVID-19 has resulted in many persons being unable to work and has led to a decrease in economic activity in the Caribbean and the rest of the world.
(a)
The decrease in economic activity will reduce the money demand in the economy with no change in money supplied by the central bank.Thus the money demand curve will shift left.This will reduce the quantity of money and the interest rate will come down due to this.
This fall in demand for money will reduce the interest rate and the price level and retards the production and shift the curve to left.
(b)
The policy implementation will shift the money supply curve to right.Thus the reduced interest rate will remains the same with higher level of money in the economy.
There was a rightward shift of the money supply curve.This will increase the level of production and thus the negative shocks will comes down.
(c)
The central bank will try to reduce the reserve requirement ratio to increase the lending rate among the commercial banks.
At the same time,it will make open market operations to sell the securities among the public.Both of this will help to pump money to the economy.
(d)
The reduction of reserve requirement ratio by the central bank will help to make the economy more effective.Thus the increasing level of money through reducing the reserve rate will easily reach the money among the hands of the people.
This will maintain the higher level of loan demanded by the public.Thus the consumption pattern will increased and the pandemic situation will comes to an end.
please see the attached file for the complete solution.