Question

Using aggregate demand and aggregate supply as a macroeconomic tools, show their dynamics and their implications on the equilibrium GDP rate of growth, inflation rate, and unemployment rate before & during the current economic developments due to Corona virus crisis ( COVID -19 ) with a reference to the Egyptian economy.

Hint: Show the shift in aggregate demand and the shift in aggregate supply (show the degree and direction of the shift).

Answer 1

Aggregate demand is the sum of demand for all goods and services in the economy and aggregate supply is the sum of supply of all the goods and services in the economy. When AD equals AS the equilibrium is established. Thus we can say that aggregate demand and aggregate supply are two most important macroeconomic tools.

If aggregate demand falls, it leads to fall in prices of the goods and services which will lead to fall in aggregate supply. We can see that aggregate demand is the main indicator of economic growth.

The Egyptian economy expanded at an annual rate of 5.6 % in second quarter of 2020. However, after COVID-19, the GDP growth is expected to be around 2%. The lockdown measures has led to sudden fall in aggregate demand and supply of the goods and services in the economy. Inflation rate was around 10% which is expected to fall to some extent due to sudden disflationary effects. Unemployment rate which was around 10% before COVID-19 has reached 25% after the lockdown measures were announced.

However, the fiscal and monetary measures are expected to mitigate the negative effects of Covid-19.