Question

Question 1 (20 marks) The recent global outbreak of Covid-19 has major economic consequences. Using the AS-AD model, show what will be short-term impact of this crisis on the AIRLINE INDUSTRY Discuss some reasons why this impact may happen. b. Bank of Canada has already taken Fiscal and Monetary policy measures to stabilize the economy during the time of this outbreak. What actions has it take in terms of Fiscal Policy? In terms of Monetary Policy? (Provide specific details, Use some reliable sources to find this information and cite the sources) Federal bank (in US) has already taken Fiscal and Monetary policy measures to stabilize the economy during the time of this outbreak. What actions has it take in terms of Fiscal Policy? In terms of Monetary Policy? (Provide specific details, Use some reliable sources to find this information and cite the sources) In your personal opinion as a consumer, how would these measures affect you. Do you think these measures will be effective in Canada? Explain in detail. Section 2: Short Questions (Answer all four) Question 2 (5 marks) Describe the impact of a contractionary monetary policy on bond prices, interest rates, investment, the exchange rate, net exports and real GDP, and the price level. Illustrate your analysis graphically with explanations. Question 3 (5 marks) Suppose the government decreases purchases in an economy with inflationary gap. How would this policy affect bond prices, interest rates, investment, net exports, real GDP, and the price level? Show your results graphically. Question 4 (5 marks) What do you understand be balance of payment? What are the main components of balance of trade? Under what circumstances countries with deficit in current account reflect a bad economy. Explain in detail? Question 5 (5 marle

Answer 1

question1

a) as due to covid -19 generally there is a sharp decline in airlines industry. as due to outbreak of corona virus many tests are being conducted in respect of security of airport . as people are travelling less so that to be aware and to stay away from this harmful disease. due to this revenues of airline industry has gone down

b) The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¾ percent, effective Monday, March 16, 2020. The Bank Rate is correspondingly 1 percent and the deposit rate is ½ percent. This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices. cite source :- bankofcanada.ca

c)

The Federal Reserve on Sunday slashed interest rates to zero percent and announced it would purchase $700 billion in bonds and securities to stabilize financial markets and support the economy.

The Federal Open Market Committee (FOMC), the Fed’s monetary policymaking panel, announced Sunday it would cut its baseline interest rate range to 0 to 0.25 percent, drastically increase purchases of Treasury bonds and mortgage-backed securities, and take several other steps to allow banks, businesses and households to weather a sharp economic downturn.

cite source :- thehill.com

d) this would result in lower the interst rates in economy and the commodity prices are tend to increase like medicines, and other items like face masks etc.

QUESTION 2:-

Bond yields are significantly affected by monetary policy—specifically, the course of interest rates. Bond price increases its yields falls. Falling interest interest rates make bond prices rise and bond yields fall.

An easy monetary policy leads to increased domestic spending and increased GDP, but it also leads to depreciated dollar and higher export demand, which enhances GDP and erases a trade deficit.

QUESTION3:-

A government may choose to use fiscal policy to help reduce an inflationary gap, often through decreasing the number of funds circulating within the economy. This can be accomplished through reductions in government spending, tax increases, bond and securities issues, interest rate increases and transfer payment reductions.

QUESTION 4 :-

Definition of Balance of payment

In the words of Kindleberger, ‘The balance of payments of a country is a systematic record of all economic transactions between its residents and residents of foreign countries.’

Balance of Trade

According to Crowther, ‘Balance of trade is a list of the values of goods imported and exported.’

Simply balance of trade is the difference between value of imports and exports of visible items only.                                  B.O.T =   Vx – Vm                                 

                                 (Vx= value of exports, Vm=Value of imports)

1. Balance of payment on Current account: - It is that account which records imports and exports of goods, services and unilateral transfers.
2. Balance of payment on Capital account: - Balance of payments on capital account of a country consists of its transactions in financial assets in the form of short-term and long-term lendings and borrowings and private and government investments.

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.