a) With lockdowns currently im

a) With lockdowns currently imposed across Europe and NorthAmerica until mid-April, even inthe best-case scenario it will take at least until mid-June formarket confidence to be restored inthese economies. The implication is that nearly six million workersin Bangladesh’s formal sector– which is largely manufacturing – will be without steady work foran extended period.

Which part of the production function do you think theissue mentioned above will affect? Drawtwo diagrams to show Real GDP and LRAS is affected in the longrun.

b) “The government should also consider an unconditional cashtransfer program for an initialperiod of three months at a rate of $95 per month, whichcorresponds to the minimum wage forthe formal sector in Bangladesh. This would cost the governmentroughly $14 billion, or 4% ofGDP. While this sort of cash transfer program always suffers fromtargeting issues, Bangladeshenjoys a highly sophisticated mobile financial services network,which could improve the coverof the program. A concerted effort involving the non-governmentalorganizations working in theinformal sector, mobile financial service providers, and thegovernment could be developed todeliver this urgently needed social assistance.”

Which type of environment under institutions is the aboveextract referring to? Explain.


A curve that shows therelationship between price level and real GDP that would besupplied if all prices, including nominal wages, were fullyflexible. The price can change along the LRAS, but output cannotbecause that output reflects the full employment output.

The LRAS represents apoint on a country’s PPC, translated into the AD-AS model.Every point on the PPC represents the maximum sustainable capacityfor production in an economy. This value of real GDP represents theeconomy’s maximum sustainable capacity with current stock ofresources.

Economic growth meansthe economy’s potential output is rising. Because the long-runaggregate supply curve is a vertical line at the economy’spotential, we can depict the process of economic growth as one inwhich the long-run aggregate supply curve shifts to theright. Economic growth can be considered as a process inwhich the long-run aggregate supply curve shifts to the right, andbecause output tends to remain close to this curve, it is importantto gain a deeper understanding of what determines long-runaggregate supply.

If the economy beginsat potential output of Y1, growth increases thispotential. The figure shows a succession of increases in potentialto Y2, then Y3, and Y4. If the economyis growing at a particular percentage rate, and if the levels shownrepresent successive years, then the size of the increases willbecome larger and larger, as indicated.


The position of thelong-run aggregate supply curve is determined by the aggregateproduction function and the demand and supply curves for labor. Achange in any of these will shift the long-run aggregate supplycurve.

Figure-2 – A, B,C




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