Answer to Question #267875 in Macroeconomics for Sana

Question

Explain how the inadequate aggregate demand has affected the output of pakistan during lockdown period?

Answer 1

Due to coronavirus crises, lockdowns were implemented that caused all manufacturing units, factories, retail units, etc. to shut down. This resulted in an increase in unemployment in the economy. Demand for labor fell that caused equilibrium wage rate to decline. Due to coronavirus crises, household's incomes declined and thus household demand for various consumer goods and services fell, thereby resulting in decline of consumption expenditure.

Coronavirus crises resulted in an increased economic uncertainty among firms and businesses. Thus firms and businesses avoided making any large investments. This caused decline in demand for capital goods and services, thereby resulting in decline of investment expenditure.

Countries closed their borders and thus international trade came to halt. This resulted in decline of net exports.

We know that aggregate demand = consumption expenditure + investment expenditure + government expenditure + net exports.

Decline of consumption expenditure, investment expenditure, and net exports caused aggregate demand to fall drastically.

As aggregate demand declined, it caused the price level to decline.

Decline in price level means prices of goods and services declined. As prices of goods and services declined, profit margins decreased and thus this demotivated the producers of goods and services.

Demotivated producers lower the production of goods and services thereby causing production and thus economic output to fall.