Case of the Day: Pandemic and Aggregate Supply and Demand
The coronavirus pandemic has obviously had massive and (at least recently in the U.S.) unprecedented effects on the economy. These effects have been both microeconomic, affecting specific firms, households, and industries, and macroeconomic. Here we focus on the macroeconomic effects.
For most shocks to the economy, we can analyze the effects of the shock into effects on aggregate demand or on aggregate supply, or sometimes both. The pandemic seems to have affected both AD and AS in important ways. Some of these effects are obvious and others may be more obscure. Some may be temporary; others are likely to be permanent.
In your responses, explain the mechanisms behind the pandemic's effects on both AD and AS, and how that would affect the economy.
Questions for analysis
1. Explain how the pandemic would affect aggregate supply in the short run.
2. Explain how it would affect aggregate demand in the short run.
3. How would these effects change macroeconomic equilibrium and are they likely to be temporary or permanent?