Precautionary Saving and Aggregate Demand Assignment Sample

• Subject Name : Management

Covid-19: The Global Shutdown - Question 1

A The phenomenon’s that are instrumental in creating the mentioned type of joint decision-making are (DİRİÖZ & ERBİL, 2020):

• Growths in oil demand as the economies are undertaking steps to reopen
• Economic recovery renews OPEC’s power struggles among other oil-producing nations.
• TO stop the continuation of the rapid production schedule
• Their decisions are directed to the pandemic that had an effect on the global economic aspect as well with consequences.
• OPEC is dominated by Saudi Arabia and Russia who let to the cut of oil prices due to the global flying and commutation’s decline during the pandemic (Ansari, 2017).

Advantages

• They had crafted a joint decision-making that allows the participating countries in the direction of producing less oil than past few months.
• Balance in Oil market is improving progressively with the increased risks and uncertainties.
• To mitigate the risk of serious lockdowns resulting in demand reduction for oil.

Disadvantages

• Can lead to fragile relationships amongst nations.
• Can create unclear demand projections
• OPEC’s tendency to put more oil in the market creates uncertainty with rise in pandemic case counts
• Lack of oil reserve due to the rise of COVID-19 cases and untimely death toll of global people particularly the oil producing countries.

B OPEC decides to cut the supply of oil because oil demands have risen from the lows during COVID outbreak. It also saw steady drops of million barrels every day in April. The desired outcome of the mentioned decision is mitigating the risk of falling demand of oil, and stops the witnessing of an annual drop in daily oil barrels demand globally for this whole year. There has been an upward shift of the supply curve due to rapid fall of demand in oil and the supply of the oil has not been controlled. On the other hand the demand curve associated with the global distribution of oil is exhibiting a downward slope due to fall in the demands and ample supply of the same (Augé, 2020).

Analyse the changes

• Commodity markets contracts are ruined (1 person purchase crude oil units in lots at a higher piece now the prices were going down)
• Due to corona no demand made it fall to the zero limit
• Due to the decrease in the prices of oil barrel dealers are selling their oil in the fear of further drop.
• The tendency to release the stock of oil results in market demand elasticity and ultimately crash
• This contract stopped the price of crude to getting further down with no demand at all
• Controlling the extra and continuous extraction of oil.
• This will help to maintain the demand curve from falling and supply curve to reach the optimal levels.

C Although OPEC practices Oligopoly but in reality it creates a win-win situation for producers and practices effective monopoly (Jefferson, 2020).

Key Features:

• It operates as a group of oil producing countries
• With a common interest in oil production.
• They are instrumental in price gauging/ collusion with security.
• They control the prices but the more control with countries that have large oil supplies compared to the few less controlling countries.

Covid-19: The Global Shutdown - Question 2

A. 105 articles

€ 1375

Calculating constant marginal cost with the use of a simple model, in which c-, F refers to the fixed cost, π being the constant one (profits) can be derived from the formulae π = (p - c) * q - F. Here p refers to the set price for the articles, c (marginal cost of number of article), and q being the quantity of ad revenue. The pricing instrumental in maximizing those profits, the first derivative is zero. Hence the first order based on other things being constant is, dπ/dp = 0. This formula calculates the optimal price. The sold number of articles is referred to as a result of a pricing function can directly or equivalently be written as:

p* = c - q / (dq/dp)

This mentioned formulae tend to ignore the considerations of long-run and does not comes handy with much consumers as surplus (or, to suppliers), hence produces growth rate slower than the available alternatives which is almost negligible in case of crude petroleum oil.

B No one, as reducing the numbers of them won’t do any good to them

If the rate of the employee’s remuneration per month is decreased then only the profit can be earned not by reducing their number.

To maximize the profit one can reduce the amount disbursed to the total number of journalists on a per month basis. But reducing the number of employees will not solve the problem. The organization can earn profit only by reducing the monthly wage of the employees rather than cutting the numbers of them. The Covid-19 situation of 2020 has severely affected economies across the globe, including India’s. The Indian economy, too, has been severely affected by this crisis, with different sectors of the economy being affected to different levels. Based on your understanding of the situation, provide detailed answers for each of the components mentioned below.

Covid-19: The Global Shutdown - Question 3

A The deficient-demand form type of unemployment can be seen in India as the demand for services along with employment types has decreased or became obsolete during the outbreak of the pandemic. There are people willing to go to move toward non-essential businesses and most other forms of business employment in private sector got closed or simply laid off. The unemployment type can also resemble to the creation of an involuntary unemployment (Prat & Valletti, 2019).

B The COVID 19 recession reinforces quick and decisive avoiding of a deep and prolonged closure of businesses with significant economic declination in India (Guerrieri et al., 2020). World Economic Outlook Report by the IMF's fears that the global economy shrinks by at least 3% in FY20-21.

The scenario compared with the 1930's Great Depression with a reminiscent Recession with widespread damage and economic crisis. The GDP of India is expected to fall leading to a rise in the unemployment rate. It can pave way for the worst economic depression in which the recession cannot be either “U” or “V” shaped. This upcoming recession is probably a “W” shaped or could turn into an “L” shaped scenario in the worst-case scenario, not in India but globally as well. The Indian economy can experience a contraction of 4.5% in FY20-21. The sale of non-essential items has fallen by 79.9% with a plunged sale of essential goods to 40% (Balleer et al., 2020).

C The aggregate demand has fallen due to corresponding fall in its components. It is due to a reduced discretionary spending structure in which the demand for durables as well as the luxury goods has seen a considerable decrease due to lockdown restrictions and cash shortage. Private Investment has fallen due to the increase in uncertainty. This had let the Indian government to practice a fiscal consolidation, targeting to mitigate the fiscal deficit (Balleer et al., 2020).

The effects on aggregate supply:

1. Leads to Higher production cost due to less number of workers.

2. Increased cost of production let to employees sacked.

3. Lead to the fall of Exchange rate letting the aggregate supply to stay without change.

4. aggregate supply falls due to Productivity decrease with Less workers and less number of articles

5. The economy’s productivity decreases leading to rise in cost of production.

6. Aggregate supply has decreased due to productivity decrease reduction in real GDP.

D. Aggregate demand and supply within a feedback loop.

The crisis is worrisome with a dual demand as well as supply shock to economy. The supply chain’s disruptions in lockdowns reduce human resource’s supply with an initial supply shock. With more extended lockdown, demands tend to get plummeted. Additionally supply gets impacted as firms shut businesses or declare bankruptcy due to low liquidity. The layoffs drive a lower consumption that will depress the demand curve. Represented in the mentioned figure as a ‘feedback loop between aggregate supply and demand’ describing a depressing economic growth of the country. In a country like India, where such pandemics affect millions of people and severely hamper the economy (Challe et al., 2017).

Covid-19: The Global Shutdown - Question 4

A If the government starts to pay compensation to the struggling companies that face employee shortage then it can decrease the production cost with the possibility of availing more business units to operate and stay open. With low-cost production, the economy can mitigate the impact of COVID-19 with more employed people leading to the rise of aggregate supply (Nicola et al., 2020).

Lowering of company tax (lower-income tax) will generate profit earnings in the market with little to no government obligations. This will decrease production costs and, keeps the aggregate supply increasing and will encourage the investors to invest considerably. Companies investing in their business will increase market confidence will help in minimizing the damage caused by the dripping aggregate demand. The tax bracket with people must be decreased with more in hand income leading to more consumers spending on buying other goods and services (Nicola et al., 2020).

Lowering of OCR, or Official Cash Rate means a decrease in interest of debts decrease. People saving will be spending with little savings or less return from them. People will borrow loans with a low-interest rate. Consumer incentives let to an increase in purchasing power. Government handouts to individuals who lost their jobs due to COVID-19 will increase Government spending, increasing aggregate demand with a steady GDP increase and leads to less economic damage allowing recessions revert.

B RBI has decreased CRR and Repo rate this will increase money supply in India as loans will be cheaper. But inflation shall increase leaps and bound. This is the way to grow faster. But apart from this government should start working with entrepreneurs to not go out of India.

Measures ensuring financial markets to function in this economic dislocations; reinforcing monetary transmission ensuring bank’s credit flows at easier terms efforts to financial stress easing inducing relaxing repayment pressures with improved access to working capital and improvement endeavor toward market functioning at high volatility with pandemic spread (Kapparashetty, 2019).

References for Covid-19: The Global Shutdown

Ansari, D. (2017). OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics. Energy Policy, 111, 166-178.

Augé, B. (2020). COVID-19: Faced with a Violent and Long-lasting Shock, African Oil Countries are Improvising the Rescue of their Economy.

Balleer, A., Link, S., Menkhoff, M., & Zorn, P. (2020). Demand or supply? Price adjustment during the Covid-19 pandemic.

Challe, E., Matheron, J., Ragot, X., & Rubio‐Ramirez, J. F. (2017). Precautionary saving and aggregate demand. Quantitative Economics, 8(2), 435-478.

DİRİÖZ, A. O., & ERBİL, E. (2020). The Prospects of Natural Gas Organization in Light of Qatar's OPEC Exit: Some Critical Reflections. The Extractive Industries and Society.

Guerrieri, V., Lorenzoni, G., Straub, L., & Werning, I. (2020). Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? (No. w26918). National Bureau of Economic Research.

Jefferson, M. (2020). A crude future? COVID-19s challenges for oil demand, supply and prices. Energy Research & Social Science, 68, 101669.

Kapparashetty, B. V. (2019). RBI Control on CRR and SLR to Private Sector Banks–A Study. IJRAR-International Journal of Research and Analytical Reviews (IJRAR), 6(4), 396-403.

Nicola, M., Alsafi, Z., Sohrabi, C., Kerwan, A., Al-Jabir, A., Iosifidis, C., ... & Agha, R. (2020). The socio-economic implications of the coronavirus pandemic (COVID-19): A review. International journal of surgery (London, England), 78, 185.

Prat, A., & Valletti, T. M. (2019). Attention oligopoly. Available at SSRN 3197930.

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