Question

The spread of the coronavirus in the US has had negatively effects on the US 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 supply model to explain short run downturn and make sure to indicate the shifts in the curve

Answer 1

The corona virus has greatly affected the us economy .Within the first quarter, the GDP has fallen as the rate of unemployment increased.

The figure below shows how gdp decreases as unemployment rises.

Given the increaing rate of unemployment,aggregate supply will shift to the left from AS0 to AS1. The new equilibrium, E1, has a reduced GDP from potential GDP to yo which is below the potential GDP.Price level also rises which increases the rate of inflation.