Question

In roughly 400 words, explain whether you think the current recession- covid-19 (I'm assuming we are in a recession, and most economists believe the same) was initially a shock to aggregate demand or aggregate supply, and explain why.

Answer 1

COVID -19 started with inducing a supply shock which has later become a demand shock. The sudden shutdowns of industries, lockdown in economies, and shutting of the border have all resulted in a fall in supply. Some industries that have been affected are construction, airline, and entertainment to name a few. This has resulted in high levels of unemployment hence low purchasing power hence affecting the aggregate demand. The fall in aggregate demand has been compensated relatively by the government through the fiscal measures as economies know how to deal with fall in demand but that is not the same case with supply. The prices of the goods indicate the effect on the demand for instance supply effect will dominate if due to the shortage, the prices are increased. Some of the economies are going through the 1st and some even the 2nd wave of the virus this results in prolonging the lockdown hence the long period of recession. In the long term, the marginal propensity to consume will decrease but there will be an increase in precautionary savings.