Question

1. crisis in both graphs and words. Explain both the current economic contraction and include the government and Federal Reserve responses. Start with thinking about how AD and/or AS would be affected by the social distancing measures which mean that people would stay home, unemployment rises, and non-essential businesses close. (250 words)

Answer 1

Observe the graph:

Due to the measure of social distancing, people are staying at home. This means even workers and most of the professionals are not working. This, has caused a huge fall in production of goods and services. On the demand side we observe since citizens are not working there has been a huge fall in their income leading to fall in national income. Many indusries due to lack of production are not recruiting or laying off wrkers temporarily or peranently. This has also increased unemployment due to lack of employers' ability to support their staff. The demand of non-essentials have suffered the most, thus leading to lesser production even there( but along the supply curvr this time.

Due to sudden drop in demand. aggregate demand curve shifts to the left. As production in the country has suffred the aggregate supply curve also shifts to the left causing lower aggregate output and price level. The government is increasing developmental spending and spending on health sectos, and the central bank pumps money into the economy. Since demand is so low deficit financing would not cause inflation. Both government and federal response acts on the demand side to increase aggreagate demand. Thus magnitude depends on the response over time, which can even restore the price level and output. If government announce financial benefits for the business sector that can boost the aggregate supply as well. Controlling supply side can help to control price level in the long run but currently we are witnessing a fall inprice level as well.