Question

Explain and graphically illustrate the impact of COVID-19 on investment spending and aggregate demand using at least one (1) of the determinants of investment spending.

A high-quality response must include the steps leading up to the change in the determinant. For example, if I were to make the claim that business taxes increased, I would have to first explain how I moved from COVID-19 to a rise in business taxes, and then trace out the effects on investment spending and aggregate demand.

please use aggregate demand graph only, thank you

Answer 1

The covid-19 has led to the fall in the spending by the consumers in goods and services. Thus, here aggregate demand is down, the profits expectations are very low following the COVID-19 pandemic spread. Thus here investment spendings have decreased since now investors are not finding its worthile to make investment. Investors are expecting the losses due to the slow economic activities.

The fall in the investment spending has further decreased the aggregate in the economy. Now economy is operating the below the full employment level.

Following is the diagram:

In the above diagram, the low profit expectations have led to the fall in the investment spending, so now Aggregate demand has shifted to the AD1, the AD1 sets up the equilibrium below the full employment level.

New equilibrium output is Y. Price level also has declined to the P1.