Question Using the AD-AS model, show and discuss how uncertain labour market conditions (reduced working hours,...

Question

Using the AD-AS model, show and discuss how uncertain labour market conditions (reduced working hours, possible layoffs, length of employment, etc.) due to COVID-19 pandemic will affect output and prices in the short-run.

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Expert Solution

Due to pandemic COVID - 19, both factors AD and AS are negatively impacted

Aggregate Demand - Demand is reduced drastically due to cessation of production of goods and services. Because that was the main source of income for individual who were demanding goods and services. Likewise small businessmen who were demanding capital goods have also reduced their demand due to cessation of production. Thus AD curve has shifted to left side as shown in below graph
Aggregate supply - Since production is closed, labor supply is stopped, no new goods are being produced and offered. Thus aggregate supply curve will shift left side.

Both curves have shifted to left side, thus there is less impact on price level, but overall real GDP has fallen sharply. Initial level of real GDP was Q. After this pandemic, new level of real GDP is Q1.

Graph is attached as below

Rahul Sunny answered 2 years ago

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