Answer to Question #114017 in Macroeconomics for annie

Question

Suppose that initially the Turkish economy is in medium run equilibrium where Pe=P and Yn=Y. Consider the developments in the economy due to Covid19 epidemic. These will effect both the aggregate demand and supply. Investment and consumption are decreasing as well as the production of many sectors. Unfortunately, the supply side model we use in this class is very simple. However, you can consider this as a case of an increase in z in the wage setting equation.
Initially ignore the policy responses, i.e assume that there is no change in G and T as well as the Central Bank behavior.
Q) Graphically show the impact of the these developments by using an AD-AS graph, and explain your graph. What is the impact of these developments on the unemployment level, and income?

Answer 1

Both the aggregate demand AD and supply AS will decrease and shift to the left, as a result the equilibrium output will decrease, but the price level may either increase or decrease. The unemployment level will increase, and income will decrease.