Question

1. How does the coronavirus affect the aggregate demand curve and the equilibrium? Explain in terms of output production and unemployment?

2. What is Fiscal Policy? Identify one item in the $2 Trillion Stimulus Package. How will this affect the aggregate demand curve?

Answer 1

Ans. Suppose initially the economy is in long run equilibrium with output Y, price level P and unemployment at natural rate. This coronavirus will lead to decline in consumption spending and private investments leading to a decrease in aggregate demand shifting AD curve fromm AD to AD’. Thus creates a situation od excess supply in the market decreasing prives from P to P’ and output from Y to Y’. As the output is below full employment level, the unemployment increases above the natural rate.

One of the areas where the stimulus package will soend is direct bank transfers and increased unemployment benefits. This will increase the consumption spending, increasing aggregate demand and shifting it to the right from AD’ to AD”. This will increase output from Y’ to Y” and price level from P’ to P” and as output has increased, the unemployment level will decrease but still will be above natural rate.

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