Reference no: EM133184308

QUESTION 1

It is the year 2030 and the UK economy, having fully recovered from the Covid-19 pandemic and recession is now hit by a computer virus pandemic. Covid-19 had led to a greater reliance on virtual work, but the government has shut down the internet to lower the reproduction rate of the virus. Anti-virus experts are working around the clock to contain the virus, but it is uncertain how long this process will take. The public, having become accustomed to shopping online, flocks to the few remaining main street stores to stock up on goods that may be unavailable due to the internet lockdown. You are advising the UK government on the economic response to the crisis.

a. You have been asked to forecast how the internet pandemic will affect GDP, inflation and unemployment. What is your forecast? You do not need to provide a numerical answer, just a qualitative answer on how the pandemic will affect these variables. Which economic indicators would you look at to provide a more informed forecast?

b. In attempt to address the social fallout from the crisis, the government has offered all workers who rely on the internet for work a monthly payment if their employers promise to keep them on payroll. Explain how this policy will affect the components of aggregate demand (C, I and G). Explain also how this policy will complicate measurement of unemployment during the crisis.

c. The Bank of England has an inflation targeting mandate. What is the rationale for an inflation target? How would you expect the Bank of England to change its monetary policy interest rate in response to the crisis?

d. The government has decided to cut income taxes to stimulate the economy. Which factors will determine how effective this policy will be? Use the factors to evaluate whether this stimulus would be effective to contain the computer virus economic crisis.

e. Prior to the crisis, UK households were heavily indebted in mortgages, with the typical household having debt equivalent to 90% of the value of their home. Write a household balance sheet for the typical UK household (if they have no other assets or liabilities) and calculate by how much house prices would need to decline to leave this household insolvent. Given that homebuilders don't rely heavily on the internet to build homes, the supply of housing continues to rise at a normal rate. On the other hand, households rely on the internet to search for housing, so the demand for housing is limited. How will these factors affect the economy's response to the computer pandemic?