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Draw the AD-SRAS-LRAS diagram for the U.S. economy starting in a long-run equilibrium before and after...

Draw the AD-SRAS-LRAS diagram for the U.S. economy starting in a long-run equilibrium before and after Covid-19. Use your diagram to illustrate and determine the SR and LR effects on U.S. GDP, the price level, and unemployment after Covid-19.

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Answer #1

Economy is at its long run before COVID-19.

In short run after COVID, consumption as well as investment fell by large which result in decrease in aggregate demand and shift demand curve to its left from AD to AD1 which result in decrease in price level from P to P1 and decrease in output from Y to Y1.

In long run, producers will try to reduce their supply as consumers have reduced their demand which will shift supply curve to its left and result in increase in price to its initial level while output level fall further.

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