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The coronavirus outbreak has brought the US economy to a sudden halt due to social distancing. To counter this negative shock, the US Federal Reserve (FED) has launched unprecedented expansionary monetary policies to fight against the widespread damage of this pandemic. Based on the IS0LM model, analyze the effects of each shock to major macroeconomic variables of the US economy. Moreover, what are the joint effects of the virus shock and monetary policies on those key variables? In an AD/AS model, what is the joint effect on inflation?

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Final answer:

The US Federal Reserve has implemented expansionary monetary policies in response to the coronavirus outbreak. Based on the IS-LM model, the joint effects of the virus shock and monetary policies would result in an increase in output and a decrease in interest rates. In terms of inflation, the effects would depend on various factors and the specific circumstances.

Step-by-step explanation:

In response to the coronavirus outbreak and the resulting economic downturn, the US Federal Reserve has implemented expansionary monetary policies to mitigate the damage. Based on the IS-LM model, the shock caused by the virus would initially decrease aggregate demand, shifting the IS curve to the left. However, expansionary monetary policies, such as lowering interest rates and increasing money supply, would then help increase aggregate demand, shifting the IS curve back to the right. The joint effects of the virus shock and monetary policies would result in an increase in output and a decrease in interest rates.

In an AD/AS model, the joint effect of the virus shock and monetary policies on inflation would depend on various factors. Expansionary monetary policies could initially lead to an increase in inflation, as increased money supply stimulates aggregate demand. However, if the shock from the virus reduces output and employment, it could lead to decreased inflationary pressure. Ultimately, the overall effect on inflation would depend on the specific circumstances and the strength of other factors influencing price levels.

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