Question

Draw and carefully describe a graph that utilizes the Aggregate Demand/Aggregate Supply model that would illustrate the state of the aggregate economy in the United States as of February 1, 2020. Make sure that you explain your graph in your own words. You should draw your own AD/AS graph which you can then embed into your post. Your graph needs to be clearly labeled and explained in some detail. Make sure that your graph includes an aggregate demand (AD) curve, a short run aggregate supply (SRAS) curve, and a long run aggregate supply curve (LRAS, Potential GDP) curve. You should clearly label both axes of the graph

The Coronavirus pandemic has resulted in shocks to both Short Run Aggregate Supply(SRAS) and Aggregate Demand. Workers that can’t go to work can’t supply goods and services. On your graph clearly illustrate the effects of the shocks to the economy through shifts in both the aggregate demand (AD) and the short run aggregate supply curve (SRAS)

How would you expect the shifts to affect real GDP and the price level? Explain how and why the spread of the Coronavirus is likely to affect consumer and business investment spending and how it will affect aggregate demand? Which sectors of the economy and occupations will be most affected? Be specific.

Answer 1

Aggregate demand and aggregate supply shock due to COVID 19 in US economy. In the case of demand shocks, individuals reducing their spending as their income falls. So that AD shifts back to AD1. and a new equilibrium point is established at B. at B, potential output falls and price falls. Similarly in the cases of supply side shocks, supply disrupted and firms closing down their business for safety measures by the government instruction. As a result AS shifts back to AS1 which further declines output to Q2 and price rise to P2. in order to increase aggregate demand, government adopted fiscal stimulus measures, as a result the AD shifts to the right (AD2) and reached a new equilibrium point C where price further rise to p2*.output came back to its normal level. But in reality government tries to find out supply of goods either from their excess reserves. No other potential supply in the economy due to lock down or restrictions imposed by the US government.

Fiscal stimulus measures will increase deficit in the economy. International exports and imports are not possible during this period.so government internally supply their goods to the citizens. And no there is no increase in potential GDP during corona virus.

Industrial sector is the most affecting sector. Accommodation services and manufacturing( retail) adversely affected and daily workers and industrial workers are badly hit by the corona virus.