Question 2 [10 points, 5 points each]: Suppose that a pandemic disrupted normal economic activity in all countries acros

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Question 2 10 Points 5 Points Each Suppose That A Pandemic Disrupted Normal Economic Activity In All Countries Acros 1 (88.6 KiB) Viewed 49 times

Question 2 [10 points, 5 points each]: Suppose that a pandemic disrupted normal economic activity in all countries across the globe. Thanks to the negotiations of oil exporting countries, oil supply continued at pre-pandemic levels, a dramatic change in world oil prices occurred, tough. Suppose further that an effective vaccine has been developed rapidly within a year and herd immunity is attained across all populations in the world, which in turn helped everything excluding oil prices return to pre-pandemic normal. Therefore, the impact of pandemic on world oil prices has lasted longer than expected. a. Use the IS-LM-FE framework under the classical assumption to analyze the general- equilibrium effects of this shock on macroeconomic variables such as output, real interest rate, real wage, employment and price level. (Hint: Assume that the leftward shift in labor supply is smaller than the rightward shift in labor demand) b. Suppose that the classical assumption on the adjustment of prices and wages fails. Then, as a response to pandemic, what kind of Open Market Operation is required to be conducted by the Central Banks to restore the general equilibrium. Use the AD-AS framework to analyze the general-equilibrium effects of necessary monetary policy on macroeconomic variables such as output, price level etc.