Comprehensive Report: The Effect of COVID-19 on the Economy of Canada

This report examines the multifaceted impact of the COVID-19 pandemic on the Canadian economy. It begins by assessing the decline in the Canadian GDP and the projected economic downturn, along with the government's response of reducing interest rates to control inflation. The analysis further delves into the expected increase in unemployment rates and the decrease in the nominal exchange rate due to the global economic collapse. The report then contrasts the classical and Keynesian economic models to understand the current economic situation, highlighting how the pandemic challenges the assumptions of both models. It explores the roles of aggregate demand and supply in the context of the pandemic, and the need for government intervention to stabilize the economy. The references include several academic papers and reports offering diverse perspectives on the economic consequences of the pandemic.

Running head: EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
Effect of Covid -19 on the Economy of Canada
Name of the Student
Name of the University
Author Note

1EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................2
Question 4..................................................................................................................................2
Question 5..................................................................................................................................2
Question 6..................................................................................................................................3
Question 7..................................................................................................................................3
Question 8..................................................................................................................................4
Refrences....................................................................................................................................5

2EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
Question 1
The disastrous effect of COVID -19 put a catastrophic effect on the Canadian GDP
and the growth rate. The economy is facing a decline in the first quarter and it is expected
that a major collapse will be observed in the coming days. It is estimated that the Canadian
economy will face a 0.20 percent decline in the real GDP of this year. As a result of this
pandemic the economic growth will drop by a projected 2.70 per cent in the second quarter1.
Question 2
The Canadian government decided to reduce the interest rate to support the economic
activity so that the inflation rate can be controlled2.
Question 3
In this critical situation the inflation rate will increase heavily due to poor economic
condition all over the world and Canada‘s inflation will increase due to that factor. As due to
lockdown all the production process get stuck and it creates impact on the economic
condition.
In order to control, the inflation rate the bank of Canada has decided to reduce the
basis point by 0.25 to keep the inflation rate in control3.
Question 4
With the temporary shutdown of many organisations it is expected that the
unemployment rate will increase by 9.50 in this fiscal year. As the companies have to suffer
huge losses it is expected that the companies will start to lay off several employees and that
will create a huge problem of unemployment in Canada4.
Question 5
As the entire economic condition in all over the world collapse due to the COVID -19
the nominal exchange rate of Canada also decreases. As all the commercial activities with
1 McKibbin, Warwick J., and Roshen Fernando. "The global macroeconomic impacts of COVID-19:
Seven scenarios." (2020).
2 Baldwin, Richard, and Eiichi Tomiura. "5 Thinking ahead about the trade impact of COVID-
19." Economics in the Time of COVID-19 (2020): 59.
3 Ozili, Peterson K., and Thankom Arun. "Spillover of COVID-19: impact on the Global
Economy." Available at SSRN 3562570 (2020).
4 Cadotte, Marc. "Early evidence that COVID-19 government policies reduce urban air pollution."
(2020).

3EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
other countries in the world has been stopped and that create adverse impact on the exchange
rates of the organisation5.
Question 6
The classical model states that the economy is free flowing in nature and the prices
and the wages make adjustments with the changes in demand with the change in time, this
means that when the time is favourable the goods, wages and prices will go up and when
times are unfavourable the prices will also go down. The main assumption of this model is
that it every individual in the society will get employment which means that all individual
who desire to work and all resources are utilised fully to their capacity. According to the
classical economists it is the nature of the economy to correct itself, which indicates that at
the time of recession the economy will not require any assistance from any one and it can
turn back again when the condition become favourable for economic prosperity.
So as per this model in the current situation as the time is not favourable for the economy the
prices , goods and wages will fall but at the same time it will again turnaround once the
situation turned back and become favourable.
As the inflation rate will increase in the current situation the real variables will be
effected by the changes in the prices and inflation while the nominal variables will not be
effected by such changes6.
Question 7
The kensyian model comes out from the great depression, economist John Maynard
Keynes states that it is wrong to say that the economy is not always in full employment.
According to this theory the economy can either be above or at below its potential. As per the
kensian theory with respect to the economic shock there will disequilibrium in the macro-
economy due to the insufficient demand, there will be imperfect labour market, and due to
this uncertain period people will try to keep more liquid and there will be deficit in spending.
Shocks are unpredictable changes in the economic situation, due to the shocks the
aggregate demand will change and if the AD changes then the output and unemployment will
change in the short run and not in the long run.
5 Selmi, Refk, and Jamal Bouoiyour. "Global Market's Diagnosis on Coronavirus: A Tug of War
between Hope and Fear." (2020).
6 Margalit, Yotam. "Political responses to economic shocks." Annual Review of Political
Science (2019).

4EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
The effect of shocks on the SRAS is dependent on the nature of the shocks that is
whether the shocks are temporary or permanent.
Only a enhancement in the LRAS will results into more output in the long run, the
self-correction process occurs as the amount of resource the country can continuously
produce depends on the stock of resources it have and not on AD and SRAS7.
Question 8
There are two main exogenous variables in the AD and AS model which are
aggregate demand and aggregate supply. This model states that with the change in aggregate
demand the aggregate supply will also changes. As during this epidemic situation both the
demand and supply of goods and services decreases the government of Canada and the bank
of Canada has to provide more liquidity in the economy so that the demand for products or
services increases and a balance occurs between the demand and supply again occurs. In this
way the current economic crisis can be solved in the long run8.
7 Stockhammer, Engelbert. "Neoliberal growth models, monetary union and the Euro crisis. A post-
Keynesian perspective." New political economy 21.4 (2016): 365-379.
8 Brady, Michael Emmett. "JM Keynes, Chapter 21 of the General Theory, and the Textbook AD-AS
Model. Why Keynes's Suggested Simplifications to His Aggregate Supply Curve Approach in Chapter
21 of the General Theory Were Overlooked." Why Keynes's Suggested Simplifications to His
Aggregate Supply Curve Approach in (2018).

5EFFECT OF COVID -19 ON THE ECONOMY OF CANADA
Refrences
Baldwin, Richard, and Eiichi Tomiura. "5 Thinking ahead about the trade impact of COVID-
19." Economics in the Time of COVID-19 (2020): 59.
Brady, Michael Emmett. "JM Keynes, Chapter 21 of the General Theory, and the Textbook
AD-AS Model. Why Keynes's Suggested Simplifications to His Aggregate Supply Curve
Approach in Chapter 21 of the General Theory Were Overlooked." Why Keynes's Suggested
Simplifications to His Aggregate Supply Curve Approach in (2018).
Cadotte, Marc. "Early evidence that COVID-19 government policies reduce urban air
pollution." (2020).
Margalit, Yotam. "Political responses to economic shocks." Annual Review of Political
Science (2019).
McKibbin, Warwick J., and Roshen Fernando. "The global macroeconomic impacts of
COVID-19: Seven scenarios." (2020).
Ozili, Peterson K., and Thankom Arun. "Spillover of COVID-19: impact on the Global
Economy." Available at SSRN 3562570 (2020).
Selmi, Refk, and Jamal Bouoiyour. "Global Market's Diagnosis on Coronavirus: A Tug of
War between Hope and Fear." (2020).
Stockhammer, Engelbert. "Neoliberal growth models, monetary union and the Euro crisis. A
post-Keynesian perspective." New political economy 21.4 (2016): 365-379.