Question

3. Starting in early March of 2020, many factories, restaurants, offices and entertainment venues closed their doors fearing the spread of Coronavirus. Using aggregate demand-aggregate supply model, predict which curve this event mostly affects and what’s the impact on the US economy in the short-run?

Answer 1

Since AD= Consumption + planned real investment + government expenditure+ export- import

It means that aggregate demand is the total quantity of output demanded at alternative price level in a given time period.

Since macro level of level of equilibrium is attained when aggregate demand and aggregate supply are equal.

As it can be seen in the diagram that initial equilibrium point is E and price and quantity are P and Y respectively.

As it has been given that Starting in early March of 2020, many factories, restaurants, offices and entertainment venues closed their doors fearing the spread of Coronavirus. As a result, production of goods and services decreases, so the aggregate supply decreases. Hence AS curve shifts leftward from AS to AS1. As a result price will increase from P to P1 and output decreases from Y to Y1.

It means in short-run price will increase and output will decrease.

It will not affect the aggregate demand because demand have not decreased.

All this has been shown in the below diagram.