In a recent survey, economists found that many small businesses might be closed down for good if stay-at- home orders last for another 4-6 months.
Part a (5 points)
Explain in word how many small businesses being shut down might affect the economy in the short run. Illustrate this in the AD-AS graph. For simplicity, you can assume that aggregate demand does not change.
- Which curve will shift?
- How would the output level and the price level be affected? - How would the unemployment be affected?
As a result of the stay at home orders and the business being shut, the supply in the economy will go down. As a result, the aggregate supply curve (AS) will shift to the left and the aggregate demand curve is unchanged. Thus, at the new point of equilibrium, the output level will decrease and the price level will increase (new equilibrium is to the north west of the old equilibrium). Since the output in the economy is going down, the number of jobs will be less and the unemployment rate will increase.
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