Answer to Question #202980 in Macroeconomics for Tsholofelo Phefo

Question

Covid-19 lockdown as a supply shock shown on the AD-PC model

Answer 1

Covid-19 lockdown as a supply shock is presented in the diagram below

The covid 19 lock down results in a higher inflation rate. Given the inflation rate, the central ban responds by choosing real interest rate which determines the unemployment rate through the IS curve. When inflation rate is high the government reduces money supply, interest rates increase and unemployment increases too.