Question

Using a carefully drawn Phillips Curve, explain what's going on with the US economy since COVID-19 an the US lockdown. Remember that as unemployment rates increased, consumer spending decreased, and deflation incurred as consumer spending greatly decreased.

Answer 1

With the wake of Covid 19 , economies like US , which are majorly export based economies with large dependence on the foreign countries regarding trade ( especially on developing nations) , are facing great crisis . The lockdown conditions across the world has reduced the market for these export based economies. This has caused not only demand deficit for companies but also excess supply for the countries. This impacts the price rate to fall in order to flush out the extra commodity production from the economy. This is the state of deflation for the economy of US. Hence inflation rate falls for Phillips curve.( from P1 to P2)

Further with lockdown extending and in order to adjust to the falling revenue due to falling prices, people are lossing job at an alarming rate. Since there is not enough economic activities for economy , it is difficult for the country to compensate for the workers. Hence unemployment rate rises in Phillips curve ( at point B)

Finally with falling employment rates and reduction of wages due to shutting of economy , direct impact is reduction of consumer's capacity to spend. With falling the consumers spending , the Economy will now face the impact low level of investments and hence the long run Phillips curve will also shift rightward , indicating that even for long run the unemployment levels are expected to remain the same ( At point B )

The above explanation is described by the following diagram :