COURSE: BUSINESS ECONOMICS

PROJECT: COVID-19: The Global Shutdown

Instructions for the submission:
● Please maintain the following: Font - Times New Roman, Font Size - 12, Line Spacing -
1.5

Name Nisha Rai

Question 1

Write your answer for Part A here.

Answer 1A: OPEC decided to cut oil supply as the early 2020 lockdown in China cased a reduction in the
demand for fossil fuels. Since keeping prices high during the crisis will only benefit America’s shale
industry, Riyadh continued oil production causing the oil prices o collapse historic low, and markets
quickly followed through. In April, OPEC had an agreement with oil oil-producing countries to cut
production by 9.7 million barrels a day from May 2020. This baseline for oil production fell into the
negative range which implicated that people would pay to get rid of their oil supplies. Traders also worried
that the US would eventually run out of oil storage spaces hence the decision. The desired outcome was to
reduce the surplus of crude oil resulting due to the lockdown worldwide. As for the Supply & demand
curve, supply exceeded the demand which causes the price to drop. There is a shift in the equilibrium when
the demand or the supply curve shifts. In the context of the oil price, buyers do not have control over the
price of oil as compared to sellers, hence the market will always find an equilibrium price established by
the levels of both supply and demand
(Graph source-Investopedia,2021)

Write your answer for Part B here.

Answer 1B: OPEC operates in an oligopoly market structure as there are only a few sellers.

The three main features of an oligopoly market structure are mainly:

1. Fewer large firms are dominating the market- 2 or more firms have significant market power and
collectively, they have the power to dictate prices & supplies
2. Interdependence- Firms under oligopoly are inyerdependentinterdependent which means that the
actions of one firm accepts affects the action of other firms.
3. High barrier to entry-Entry into the industry is restricted due to the existence of big players in the
market
 Question 2

Write your answer for Part A here.

Answer 2A:

• Assuming that each article brought about a profit of €375 per article, the company was producing at least
54 articles per month.
• The total profit made was €2,500
• Assuming the profit for the entire duration based on the below below-given, the total profit was €2,500
as the business was suffering a loss in the initial 3 months hence when calculation profit over the 10
months in the able, we have to take into account covering up/ making-up for the losses made in the initial
phase.

Fixed Total
Articles Cost Variable Cost Average
No. of per per Cost per per Total Marginal Total Marginal Total
Journalists Month Month Month Month Cost Cost Revenue Revenue Profit
€ €
1 15 € 8,000 € 3,000 11,000 11,000 € 375 € 5,625 € 5,625 -€ 5,375
€ €
2 29 € 8,000 € 6,000 14,000 14,000 € 375 € 10,875 € 10,875 -€ 3,125
€ €
3 42 € 8,000 € 9,000 17,000 17,000 € 375 € 15,750 € 15,750 -€ 1,250
€ € €
4 54 € 8,000 12,000 20,000 20,000 € 375 € 20,250 € 20,250 € 250
€ € €
5 65 € 8,000 15,000 23,000 23,000 € 375 € 24,375 € 24,375 € 1,375
€ € €
6 75 € 8,000 18,000 26,000 26,000 375 € 28,125 € 28,125 € 2,125
€ € €
7 84 € 8,000 21,000 29,000 29,000 € 375 € 31,500 € 31,500 € 2,500
€ € €
8 92 € 8,000 24,000 32,000 32,000 € 375 € 34,500 € 34,500 € 2,500
€ € €
9 99 € 8,000 27,000 35,000 35,000 € 375 € 37,125 € 37,125 € 2,125
€ € €
10 105 € 8,000 30,000 38,000 38,000 € 375 € 39,375 € 39,375 € 1,375
Write your answer for Part B here.

Answer 2B:

• I would fire 7 employees assuming the factor of maximizing profit.

• The total new profit across 10 months is €15,000 assuming only 3 employees are working and publishing
42 articles per month.
• Since the fixed cost of €8,000 has been eliminated, profit has been maximized. It was seen that 3 staff
were bringing back maximum profit and having more than 3 staff means more expense in terms of salary
pay-outs and since companies also reduced their advertising spendings, it only made sense that reducing
7 staff was optimal. Based on the below table, there is a break-even where the profit generated by 4
employees was the same as the profit generated by 3 employees. The company would have eventually
suffered a loss if they had continued with more than 3 employees.

Fixed
Articl Cost Variabl Total
es per per e Cost Cost Average Margi
No. of Mont Mont per per Total nal Total Marginal Total
Journalists h h Month Month Cost Cost Revenue Revenue Profit
1 15 € 3,000 € 3,000 € 3,000 € 250 € 3,750 € 3,750 € 750
2 29 € 6,000 € 6,000 € 6,000 € 250 € 7,250 € 7,250 € 1,250
3 42 € 9,000 € 9,000 € 9,000 € 250 € 10,500 € 10,500 € 1,500
€ €
4 54 12,000 12,000 € 12,000 € 250 € 13,500 € 13,500 € 1,500
€ €
5 65 15,000 15,000 € 15,000 € 250 € 16,250 € 16,250 € 1,250
€ €
6 75 18,000 18,000 € 18,000 € 250 € 18,750 € 18,750 € 750
€ €
7 84 21,000 21,000 € 21,000 € 250 € 21,000 € 21,000 €0
€ €
8 92 24,000 24,000 € 24,000 € 250 € 23,000 € 23,000 -€ 1,000
 € €
9 99 27,000 27,000 € 27,000 € 250 € 24,750 € 24,750 -€ 2,250
€ €
10 105 30,000 30,000 € 30,000 € 250 € 26,250 € 26,250 -€ 3,750

Question 3

Write your answer for Part A here.

Answer 3A:

Countries like India would experience cyclical unemployment during pandemics as cyclical unemployment is
temporary and typically only last while a business cycle is suffering due to contraction in economic growth.
Cyclical unemployment is usually a short-term phenomenon, however, action, if the recession is severe then
cyclical unemployment can last for a few years.

An example of cyclical unemployment is the increase in layoffs because of the pandemic. With this decrease in
revenue and the onset of a recession in 2020, many businesses were forced to lay off their employees across a
variety of industries, and many of these unemployed faced difficulties finding new jobs.

Write your answer for Part B here.

Answer 3B:

Covid-19 has caused a historical global recession since World War 2. A global recession means the entire
world is impacted by this pandemic. A recession is defined as ‘A significant decline in economic activity that
lasts more than few months which is visible in the real GDP, income, employment, and many other ways.

Recession is defined in various shares called the ‘Shape of recession’ as follow:

1. V-Shaped recession- Steep Decline, Quick Recovery

2. U-Shaped recession- Long Period Between Decline and Recovery
3. W-Shaped Recession- Quick Recovery, Second Decline
4. L-Shaped Recession- An Extended Downturn
 The pandemic has also caused an unusual surge in unemployment which is also called ‘The Great
Resignation’

Some had predicted the economic recovery as V-Shaped in the 1st quarter of 2020 however due to the
temporary lockdowns, it was forecasted that the recovery is more likely U-Shaped. Since the coronavirus
was announced as a Novel and no one know how this would affect the spread or whether how contagious it
was, and there was a level of uncertainty if a 2nd or 3rd wave was to hit, their recovery was transformed to
W-Shaped however since multiple variants of the virus is being identified, it seems that the CPVID-19
recession is more of a L-Shaped recession since there could be an extended downturn although there is a
global movement towards economic recovery by open international borders.

Question 4

Write your answer for Part A here.

Answer 4A:

The few types of Macroeconomics policy the Indian government should adopt from the Covid-19 crisis are
mainly:

1. Fiscal Policy- refers to changes in government expenditure and taxation. Government expenditure, also
called public spending, and taxation takes place to occur at two main levels - national level and local
level. Governments spend money on a variety of items, including social benefits (for pensioners, the
unemployed and the disabled), education, health care, transport, defense, and interest on national debt.

2. Monetary Policy- includes changes in the money supply, the rate of interest, and the exchange rate.
An increase in the interest rate helps implement a deflationary monetary policy which is likely to
reduce aggregate demand by lowering consumption and investment. Households will spend less due to
the availability of less discretionary income, borrowing becomes more expensive, borrowing and
greater incentive to save is greater. Changes in the money supply and changes in interest rates are
implemented by Central Banks on behalf of governments. If the money supply is increased by the Bank
printing more money, buying back government bonds, or encouraging commercial banks to lend more,
the aggregate demand increases. On the other hand, a decrease in the money supply reduces aggregate
demand.
 3. Supply-side Policies- designed to increase aggregate supply and hence increase productivity potential.
Such policies aim to increase These measures aim to increase the quantity and quality of resources and
improve the efficiency of markets. They include improving education and training, cutting direct taxes
and benefits, reforming trade unions, and privatization. Improving education and training should
increase labor productivity. The reason behind cutting direct taxes and benefits is to make work more
attractive compared to living on benefits.

Write your answer for Part B here.

Answer 4B:

The Reserve Bank of India should adopt the following policies:

1. Monetary policy
2. Liquidity management and special credit facilities
3. Fiscal cooperation
4. Regulatory measures

1. Monetary policy
The operational target of monetary policy is the weighted average overnight rate (WACR), which
reflects the rate at which transactions are executed in the unsecured segment of the overnight
money market.
2. Liquidity management and special credit facilities
RBI actively manages liquidity on a daily basis through Liquidity Adjustment Facility (LAF)
operations. These operations were significantly expanded with the introduction of long-term
repurchase agreements (LTROs) in February-March 2020 with maturities of one year and three
years to support monetary transmission and increase credit to the productive sector.

3. Fiscal Cooperation
➢ Ways and means advances- The Reserve Bank of India grants Ways and Means Advances
(WMA) to the Government of India and state governments to help them bridge temporary
imbalances in their revenue and expenditure cash flows.
 ➢ Asset purchases- The Reserve Bank is the debt manager for both the Central and State
Governments. In principle, it acts as the front and back office of a conventional government
debt office. However, the RBI has maintained an active program of buying government
securities in the secondary market through its open market operations (OMOs).
➢ Operation twist- Since December 2019 till date, under Operation Twist (OT), the RBI has
undertaken special OMOs involving the simultaneous purchase of long-term government
securities and liquidity-neutral sale of corresponding short-term securities of similar
amounts. As a result of all these measures and as the government's debt manager, the RBI
has managed to manage the highest ever level of the government's market credit program

4. Regulatory Measures

➢ Credit enhancement measures- In view of the total and sudden freeze imposed by the
government, the RBI imposed a moratorium on payment of instalments on all pre-Covid
loans at the very outset. Similarly, payment of interest on working capital facilities was
deferred - banks were allowed to convert them into term loans. These measures were
intended to provide temporary relief to borrowers facing liquidity constraints due to the
pandemic and to provide flexibility to banks in dealing with such borrowers.

➢ Regulatory forbearance- It was predicted that the unfolding of the pandemic and the
associated economic impact on the overall macroeconomic environment would adversely
affect asset quality, capital adequacy and the profitability of financial intermediaries,
including banks. The unprecedented injection of ample liquidity into the system and the
reduction in interest rates helped to protect financial institutions from the worst effects of
the crisis. It was also deemed necessary to support these systemic measures with appropriate
regulatory forbearance. The RBI also felt that it would be helpful to allow lenders to
implement workout plans for such borrowers while keeping their loans in the standard
classification. It has, therefore, introduced a new resolution framework for such borrowers.

➢ Macroprudential measures- The RBI had taken various macro-prudential measures during
the North Atlantic Financial Crisis (NAFC) to maintain financial stability. After this
 positive experience, RBI has again taken some macro-prudential measures in the light of
Covid.

The RBI since February 2020 shows the broad objectives it is trying to achieve through its policies. Among its
multiple objectives are:

• Minimizing the adverse macroeconomic impact of the Covid 19 pandemic and related closures.
Improving the effective transmission of monetary policy
• Ensuring a smooth and seamless transmission of monetary policy stimulus
• Preserving financial stability by preventing the freezing of financial markets and maintaining the
orderly functioning of financial markets and financial institutions
• Maintain a sound, liquid, and smoothly functioning financial system and financial market so that
financial resources benefit all stakeholders. Ensure normal functioning of financial intermediaries
to facilitate the flow of funds at affordable interest rates and revive investment momentum Maintain
bank credit on favorable terms Ensure access to finance for all, especially for the most affected
sectors
• Reduce the financial burden on households and businesses
• Facilitating trade, both exports and imports, through easy availability of credit and payment
services
• Facilitating the conclusion of enhanced market borrowing programs by both the central and state
governments in a non-disruptive manner
• Ensuring orderly development of the yield curve
• Ensuring proper and smooth functioning of payment and settlement systems at both retail and
wholesale levels
• Maintaining a smooth and regular flow of funds throughout the country