The spread of the coronavirus in the U.S. has had negative effects on the U.S. economy....

The spread of the coronavirus in the U.S. has had negative effects on the U.S. economy. GDP growth rate went negative (-5.8%) in the first quarter of 2020 and unemployment rate spiked to 14.7% in April. Use the aggregate demand and aggregate supply model from chapter 10 to explain this short run downturn? Make sure to indicate the shifts in the curves.

Expert Solution

Ans. Prior to the coronavirus pandemic, U.S. was at long run equilibrium having output at full employment level Y and unemployment at natural rate.

Due to coronavirus pandemic, consumption spending by households and investment by businesses both fell decreasing the aggregate demand for goods and services in the economy shifting the aggregate demand curve to the left from AD to AD'. Also, due to disruption of global supply chains and shutdown of industries due to lockdowns, aggregate supply of goods and services decreased shifting the short run aggregate supply to the left from SRAS to SRAS'. This leads to fall in the level of output from full employment level of output, Y to Y'. This decrease in output leads to fall in demand for labour increasing the unemployment rate beyond the natural rate.

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Rahul Sunny answered 2 years ago

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