Question

The spread of the coronavirus in the U.S. has had negative effects on the U.S. economy. GDP growth rate went negative (-5.8%) in the first quarter of 2020 and unemployment rate spiked to 14.7% in April. Use the aggregate demand and aggregate supply model from chapter 10 to explain this short run downturn? Make sure to indicate the shifts in the curves.

Answer 1

The Coronavirus pandemic took the world by surprise and most people were not ready for the far reaching quarantine measures that were put in place. These measures along with the general fear of the disease meant that Consumers were demanding less of goods and services which had the effect of shifting the Short Run Demand curve to the left.

The world also saw travel restrictions put in place which were a serious blow to international commerce because suppliers found it hard to source goods. This reduced the supply of goods and services which also meant that the Short Run Aggregate Supply Curve shifted to the left as well.

The New Equilibrium led to a way lower output at Y¹ which is shows why GDP growth fell into negative.

As a result of decreased output and quarantine measures, companies could not afford to keep their employees and had to let go of a lot of them. This is why the Unemployment rate went up as well.