Question

Using economic terminology, in a brief paragraph, explain HOW the COVID-19 virus has shocked the US economy. Draw the impacts on an AD/AS graph. (Hint: start with the AD/AS model in equilibrium and then demonstrate your curve shifts.) In another short paragraph, briefly explain the US government's fiscal policy initiatives to get the economy back to equilibrium. Draw the expected impact on a new AD/AS graph. (Hint: start with the AD/AS model in disequilibrium and demonstrate the appropriate curve shift.)

Answer 1

The spread of Covid-19 tends to cause a negative supply shock to the global economy, by forcing industries to shut down and disrupting the international supply chains. Moreover the outbreak of Covid-19 causes a demand-driven slump, widening the supply-demand doom loop.
It is illustrated by the AD curve in Graph-1 giving a rise to positive variables between growth of productivity (g) and employment (l). In the enclosed graph initial equilibrium at point A and due to coronavirus the growth of productivity moves from g to g'; thus causing the equilibrium to move at point B. It causes a reduction in demand and the involuntary unemployment as the spread of coronavirus epidemic causes a negative impact on expectations of agents’ on the future growth of productivity, and induce a demand-driven recession. Now if the monetary stimulus is made through the strong government and individual's multiple income stream there will be a rightward shift of the AD curve towards the AD'. Example: An individual can contribute to money market with mitigation in the contraction in output. When the consumer is confident on the expectations of future income, it would cause an increase in demand; and reduces the supply-demand doom loop or vicious spiral