The Covid-19 pandemic had a profound impact on the global economy, causing a significant leftward shift in the aggregate demand (AD) curve. The imposition of lockdowns, travel restrictions, and social distancing measures led to a decrease in consumer spending, business investments, and overall economic activity. As a result, the demand for goods and services declined, shifting the AD curve to the left.
Simultaneously, the pandemic also affected the aggregate supply (AS) curve. Supply chain disruptions, labor shortages, and production constraints caused a leftward shift in the AS curve, limiting the economy's capacity to produce goods and services. The combination of a leftward shift in both AD and AS curves resulted in a decrease in real GDP.
To address the economic downturn and return real GDP to its potential level, policymakers must adopt appropriate fiscal measures. In this context, an expansionary fiscal policy is the recommended approach. Expansionary fiscal policy involves increasing government spending and/or reducing taxes to stimulate economic activity. By doing so, the government aims to boost aggregate demand, encourage investment, and create employment. This policy approach is particularly effective during times of economic contraction, as it counteracts the negative effects of a demand shock.