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The AD/AS Model: the COVID-19 pandemic and economic lockdown Use the AD/AS model to illustrate the effects of the COVID-19 pandemic and subsequent economic lockdown
The AD/AS Model: the COVID-19 pandemic and economic lockdown
Use the AD/AS model to illustrate the effects of the COVID-19 pandemic and subsequent economic lockdown. Be sure to explain:
- what curve(s) shift,
- in which direction,
- and why specifically (i.e., what AD and/or AS factors are affected by these events)
- discuss what will be the effect on Real GDP, unemployment and inflation given the shift(s) you described
- Finally, include an AD/AS graph to illustrate your answers above.
Expert Solution
The Covid-19 pandemic and lockdown has reduced consumption and investment expenditure in the economy because of negative consumer and business sentiments in the economy. This has led to reduction in the level of aggregate expenditure in the economy. This has shifted the aggregate demand curve leftwards because of decline in overall expenditure in the economy. On the supply side, it was noticed that the pandemic reduced the supply of factors of production which increased cost of production in the economy. This has shifted the aggregate supply curve of the economy leftwards. The impact on aggregate demand and aggregate supply can be depicted as:
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