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    IMT Covid19

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    Arjun Raj
    1) The document discusses collusion in cartels and OPEC's decision to cut oil supply. It also addresses features of oligopoly markets and questions related to profit maximization, cyclical unemployment, and fiscal and monetary policy responses to recession. 2) Unemployment increases during economic downturns due to reduced demand. Both supply and demand are negatively impacted initially by lockdowns and later by reduced consumption. 3) Expansionary fiscal and monetary policies can increase aggregate demand and shift curves to the right, lowering unemployment over time. Direct spending, tax cuts, easy credit, and cash transfers can stimulate the economy.

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    IMT Covid19

    Uploaded by

    Arjun Raj
    89 views6 pages
    1) The document discusses collusion in cartels and OPEC's decision to cut oil supply. It also addresses features of oligopoly markets and questions related to profit maximization, cyclical unemployment, and fiscal and monetary policy responses to recession. 2) Unemployment increases during economic downturns due to reduced demand. Both supply and demand are negatively impacted initially by lockdowns and later by reduced consumption. 3) Expansionary fiscal and monetary policies can increase aggregate demand and shift curves to the right, lowering unemployment over time. Direct spending, tax cuts, easy credit, and cash transfers can stimulate the economy.

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    1) The document discusses collusion in cartels and OPEC's decision to cut oil supply. It also addresses features of oligopoly markets and questions related to profit maximization, cyclical unemployment, and fiscal and monetary policy responses to recession. 2) Unemployment increases during economic downturns due to reduced demand. Both supply and demand are negatively impacted initially by lockdowns and later by reduced consumption. 3) Expansionary fiscal and monetary policies can increase aggregate demand and shift curves to the right, lowering unemployment over time. Direct spending, tax cuts, easy credit, and cash transfers can stimulate the economy.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    89 views6 pages

    IMT Covid19

    Uploaded by

    Arjun Raj
    1) The document discusses collusion in cartels and OPEC's decision to cut oil supply. It also addresses features of oligopoly markets and questions related to profit maximization, cyclical unemployment, and fiscal and monetary policy responses to recession. 2) Unemployment increases during economic downturns due to reduced demand. Both supply and demand are negatively impacted initially by lockdowns and later by reduced consumption. 3) Expansionary fiscal and monetary policies can increase aggregate demand and shift curves to the right, lowering unemployment over time. Direct spending, tax cuts, easy credit, and cash transfers can stimulate the economy.

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    Name Arjun Raj

    Question 1

    This phenomenon is Collusion. A cartel is formed by a group of firms who colluded. Collusion
    takes place when firms come together to influence output and price of product. Collusion can
    be Overt, Covert or of Tacit nature.

    Advantages:

    1. Assurance of profit – Members are assured reasonable profit as they can set the price
    2. Monopoly power- They can restrict competition
    3. Marketing economics- Since goods are oferred as a single non differential offering,
    competitive pricing and product positioning is avoided
    4. Production Efficiency
    5. Economics of Scale
    6. Ability to withstand business cycle

    Disadvantages:

    1. Creation of monopoly – Adverse effect on consumer interest


    2. Creation of excess capacity

    OPEC decided to cut the supply of oil to control and stabilize oil prices and to control oil stock
    builds.

    Desired outcome to rebound the decreasing oil prices due to COVID-19.

    The supply decreased post the supply cut decision taken by OPEC but due to the ongoing
    pandemic and strict governmental lockdowns, the demand remained constant. Hence the
    Supply curve moved left and the equilibrium price increased from an all time low in the
    previous month..
    The equilibrium output level decreased. This created a state of stagflation.

    OPEC operates as an Oligopoly market.

    Key Features:

    1. Interdependency – Dependent on each other.


    2. Strategy
    3. Barriers to entry – too costly or difficult for ne players to enter the market
    4. Collusive oligopolies
    5. Product customization – identical products

    Question 2

    • At profit maximizing level, the business was producing 92 articles


    • Total Profit = 2500Euros
    • Considering a competitive market, marginal revenue curve is horizontal. Also the firms
    demand curve is horizontal. So we conclude that max profit is when marginal cost =
    marginal revenue.
    ie. No of journalist – 8
    Articles – 92
    Profit – 2500 Euros

    • In the new market condition, 4 journalists need to be fired


    • New profit = 1500 Euros
    • Having more than 4 journalists will negatively impact profit
    Profit maximization occurs at marginal cost of 250 euros which is 4 journalist
    Question 3

    Unemployment faced is cyclical unemployment. It occurs when the econoy enters a period of
    contraction - economic recession or decline. This results in reductoin on demand in the
    economy and hence reduction is requirement for supply (which leads to unemployment)

    This pandemic will create a supply lead recession followed by demand lead recession

    Loss of economic output due to 2months of lockdown was triggered from supply side as labor
    were at homes in lockdown. The demand side caused further loss in output as demand reduced
    due to lack of mobility in lockdown. This twin shock led to loss of incom and further loss in
    output due to decline in consumption

    The effects of cyclical unemployment and recession on the aggregate demand(AD)and


    aggregate supply(AS)in India, would be, the aggregate supply would fall as labor stayed away
    from work due to unemployment or restriction on mobility resultantly the demand would fall
    in the short run as the lockdown period is extended and the people would have lower
    consumption appetite.

    If there is a recession and therefore an increase in unemployment associated withadecrease in


    output, this results in more scarcity. The AD&AS equilibrium level of real GDP would
    substantially fall below potential GDP, as the price level would also fall and in the short run
    the aggregate demand in India comes down whereas in the long run the aggregate supply in
    India would also come down causing a negative supply shock as the work force takes a wait
    and watch approach for resumption of day to day jobs, and increase in the prices of the raw
    materials required for the output creation would result in aggregate supply to go down.
    The AD & AS equilibrium will fall below GDP, price will fall, short run demand will fall and
    in long run supply also will fall and then it will go into a wait and watch scenario to resume
    day to day aspects

    A Reduction in AD causes a leftward shift in the aggregate demand curve. This reduction
    would lower the GDP and price levels which would lead to economic contractions, making
    demand fall below the economy's potential GDP, and hence causing a recession.

    Moreover, the real GDP then falls and so does the equilibrium price level. Due to a reduction
    in demand and price levels, businesses would cut their workforce hence increasing the
    unemployment rate. Relatively low cyclical unemployment for an economy would occur when
    the level of output would be close to potential GDP, arise when the output is substantially to
    the left of potential GDP In an AD/AS diagram, cyclical unemployment is shown by how
    close the economy is to the potential or full-employment level of GDP.

    Question 4

    The Indian government should adopt an expansionary fiscal policy in case of such a crisis.
    During a recession, the government should opt for a fiscal policy which has a higher multiplier
    effect and shifts the aggregate demand curve to the right

    India's fiscal support measures can be:

    • Direct spending and foregone or deferred revenue


    • Below-the-line measures designed to support businesses and shore up credit provision
    to several sectors.
    • The government should enact these policies through budgeting tools that would
    provide people with more money resultantly increasing the consumption.
    • Increasing spending and cutting taxes to produce budget deficits means, that the
    government should be putting more money into the economy than it is taking out. It
    can be extended to transfer payments, rebates and increased government spending on
    projects such as infrastructure improvements and other rehabilitation schemes. This
    would also help in decreasing the cyclical unemployment.
    • Emergency health fund- The stimulus can also include insurance cover for doctors,
    paramedics and healthcare workers,
    • Free food grains provision and direct cash transfers through DBT for disadvantaged
    sections of the population Include a mix of short-term relief provisions and a scheme
    for affordable rental housing for migrant workers and urban poor Quasi fiscal
    measures; activities undertaken by state-owned banks and enterprises, and some- times
    by private sector companies at the direction of the government, where the prices
    charged are than usual or less than the "market rate."

    The Reserve Bank of India should adopt a dovish monetary policy, that is an expansionary
    monetary policy. The Monetary policy designed should be regulating money supply and
    interest rates and buying Government bonds to increase money supply

    Policy measures to be adopted;

    • The enhanced liquidity resulting from the monetary measures should keep the
    borrowing cost for the central and state governments from rising up inordinately.
    • The RBI should introduce regulatory measures to promote credit flows to the retail
    sector and micro, small, and medium enterprises(MSMEs)
    • Easing financial constraints for states - Ease the amount of money banks are required
    to maintain as reserves, this would promote banks to lend more resultantly pushing the
    aggregate demand to the right and helping in reducing the unemployment and opening
    up the economy.
    • Lowering the discount rate charged by RBI(repo rate and reverse repo rate),the cost of
    borrowing for the banks would decrease, in turn putting more money back in the
    economy by the ways of loans available at better cheaper rates.
    • They can also come up with measures targeting businesses and increasing the FII/FPI
    interest in the Indian economy so as to increase the foreign inflows in the country
    resulting in more employment opportunities and shifting the supply or the demand
    curves to the right depending upon how to foreign money is being utilized.

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