Present a macroeconomic analysis of how aggregate supply and demand and macroeconomic equilibrium are expected to...

Present a macroeconomic analysis of how aggregate supply and demand and macroeconomic equilibrium are expected to be affected by the economic incentives because of COVID

Expert Solution

Covid Pandemic has led to to a huge fall in aggregate demand . It has also resulted in supply disruptions. Production activities in the economy has been also harmed.

Stimulus packages are announced by nations all over the world to boost the economic activities.

Now let's analyse how macroeconomic equlibrium is to be affected by the economic incentives with the help of a diagram.

Assume that, as a result of corona pandemic ,aggregate Price level in the economy is P1 and output is Y1 determined by the intersection of short run aggregate supply curve SRAS1 and aggregate demand curve AD1 . Its evident that, actual GDP Y1 is less than Y* which is the Potential GDP. Therefore, Covid 19 has resulted in a recessionary gap in the economy.

Stimulus packages or economic incentives aims to bring the economy out of the present situation.

Economic incentives are supposed to increase consumption, investment and net exports. Goverment expenditure has already been increased tremendously. Consumption, investment, government Expenditure and net exports are important components of aggregate demand. Therefore, rise in these components will lead to a rise in aggregate demand. Aggregate demand curve will shift to right from AD1 to AD2. Short run aggregate supply will adjust itself to the rising demand. Short run aggregate supply curve will also shift to the right from SRAS1 to SRAS2. Intersection of AD2, SRAS2 and LRAS will bring the economy back to equlibrium and the recessionary gap will be closed.

Rahul Sunny answered 8 months ago

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