Question

Use the AD/AS model to speculate what happened with rGDP and inflation during the COVID-19 pandemic and quarantine from March 2020 to July 2020. Here's a link to an interesting article on consumer spending behavior (Links to an external site.) to get you started.

1. An analysis on the COVID-19 pandemic using the AD/AS model, including thorough explanation of the relevant shifters of the AD and/or AS model.
2. A detailed explanation of what may happen to inflation and rGDP as a result of your analysis.

Answer 1

The lockdown during covid 19 led many people to start saving their money . As they started saving the money , the aggregate demand fell .

As there was a lockdown and all the firms were shut . It lead to fall in the aggregate supply as well because there was no labour and lead to massive unemployment.

Reduction in aggregate demand and reduction in aggregate supply leads to reduction of real GDP.

Hence during covid 19 , the real GDP of almost every country fell.

According to AS and AD model , there was a negative supply shock and negative demand shock which affected the GDP and led to fall in real GDP.

Hence the AD curve shifts left as there was fall of aggregate demand and the AS curve also shifts left as the aggregate supply reduced during lockdown and quarantine period due to COVID 19.

Effect on inflation :

As during covid 19 lockdown ie from March to July 2020 there is negative demand shock ie demand was very low and negative supply shock ie there was negligible production , which means the prices were stable in the lockdown which didn't lead to inflation.

But post lockdown , if the supply shock is more than the demand shock then it may lead to inflation in the coming future .