Question

This question will concentrate on using our AS-AD model to understand the economic consequences of the COVID-19 pandemic, as well as policies currently being enacted or considered.

Imagine it is January of 2020, the US economy has record-low unemployment rates, and GDP is above potential GDP.

As awareness about COVID spreads, businesses begin to enact heightened cleaning routines and social distancing which results in a fall in productivity. The stock market falls due to low consumer confidence, and spending on travel and restaurants plummet.

Using an AS-AD diagram (as well as an AE-Y diagram to show the mechanics of any shift to AD), show the effects of these events, discussing real GDP, price levels, and unemployment.

Answer 1

In this case both AD and AS will decrease and shift to the left, as a result the real GDP will decrease, the price level may either increase or decrease, and unemployment will increase.