Question

1. With the aid of an AD-AS diagram, explain how coronavirus (covid-19) has affected the macroeconomy.
2. Specifically, how has GDP, employment, unemployment, and inflation changed because of covid-19? Use real and current numbers.
3. Describe the monetary policy response to the pandemic.
4. Describe the fiscal policy response to the pandemic.
5. How will the monetary and fiscal policy responses affect the AD-AS diagram you drew in (1)?

Answer 1

Covid 19 has it impact upon all the nations. It has adverse impact on the economic growth of nations .

Due to lockdown, there is complete recession in nations. There is decrease in income , output and employment. Aggregate supply has decreased and due to decrease in supply, production has reduced, worker get unemployed and income has reduced. This also have impact on the aggregate demand. People have lost their belief in demand and consume less goods and services.

Due to decrease in aggregate demand, demand curve shifts backwards and due to decrease in aggregate supply , aggregate supply curve shift backwards . Due to that equilibrium price increases from p to p1 and equilibrium GDP reduced from Q to Q1. Due to decrease in real GDP unemployment in nations increases and economic growth decrease

Take action by monetary and fiscal policy-

Fiscal policy used by fed is expansionary . Taxes are reduced and spending is increased. Due to that aggregate supply curve will shift rightwards and again full equilibrium will be attained. The reason is expansionary fiscal policy increase production and increase in production provides employment and employment leads to increase in income.

Expansionary monetary policy-discount rate is reduced and central bank buys government securities through open market operations. Increase money supply in banks. Interest rate falls and borrowing becomes cheaper. Investment increases. Increase in investment leads toward increase in production and increase in production provide employment and employment leads to increase in income.

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