Question

Q-is the corona virus crisis a demand shock or a supply shock or both, present your argument and show it graphically?

Answer 1

Corona virus is a combination of demand as well as supply shock.

People have less money to spend on goods and services because some have lost their jobs while others are running out of their savings Less money to spend on goods and services will reduce the demand of goods.

Many factories and firms producing non-essential goods are temporarily shut which will reduce the aggregate supply of goods in the economy.

Reduction in both demand as well as supply of goods will result in fall in output level from Y to Y2 while price is constant.