Question

Show the effect of COVID 19 on the US Economy (before and after) graphically using the Mishkin's AD/AS Model :

Answer 1

Due to COVID-19, the consumption has fallen maily of durable and semi-durable goods and the private investment has also fallen because of the uncertainty pertaining in the market. This will cause the aggregate demand for the economy to fall. Before the crises the aggregate demand curve was AD and output was at long run equilibrium Y and price level/inflation at P’. After the COVID-19, with fall in aggregate demand cause the AD curve to shift to AD’. Now, the new output is Y’ and economy faces a recessionary gap of Y-Y’ and the price level/ inflation has also decreased to the level P. The government’s recently announced fical package will increase the aggregate demand in the economy, shifting the aggregate demand curve rightward back to AD. This will bring the output back to the long run equilibrium Y and close the recessionary gap of Y-Y’.

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