Question

1. Assume that the US was at full employment prior to the coronavirus pandemic. Illustrate graphically, using the Aggregate Supply/Aggregate Demand (AS/AD) framework, the full employment equilibrium price level and GDP. Label the price level P0 and the full employment GDP as Q0 in your diagram. You will need three curves: an aggregate demand curve, a short-run aggregate supply curve, and a long-run aggregate supply curve.

2. Given your answer to part (1), illustrate in the same diagram what effect the coronavirus pandemic is likely to have on the economy, given the article you read. Identify the new equilibrium price and GDP level and label them P1 and Q1 respectively.

3. Explain the rationale behind your answer in part 2.

4. What types of fiscal policy responses would make sense at this time, given your answers to parts (2) and (3)? How would they affect the diagram you have drawn?

please draw/show your work. and ill give you thumbs up

Answer 1

Initially the economy is at its long run equilibrium where aggregate demand = short run supply (SRAS) curve = long run supply (LRAS) curve and output level is Y*. Economy is at its economic equilibrium of point A where price is P0 and output produced is Q0

a)

b) Aggregate Demand = Consumption + Investment + Government Spending + Exports - Imports

Due to coronavirus pandemic, people are just consuming edible items which have reduce consumption. Investments are put on hold due to temporarily shut down of markets. No country is trading goods with other country whic have reduces exports to other countries.

All of the above factors will reduce aggregate demand in the economy and shift aggregate demand curve from AD to AD1 which shifts economic equilibrium from point A to B which results in fall in price from P0 to P1 and output fall from Q0 to Q1.

c) To raise the aggregate demand, government of US will raise aggregate demand by adopting expansionary fiscal policy which raises government spending and reduces tax (raises disposable income). Both of the factors raise aggregate demand from AD1 to AD curve again which shift economic equilibrium from point B to A again and raise output level again to Q0 and price to P0.