Question

The government issues “stay-at-home” orders earlier this year. Using an AD-AS model, show how this affects the US economy. Be sure to label all parts of the graph and briefly explain what may happen to price levels and real GDP.

Answer 1

Stay at home order is likely to reduce real GDP much lower relative to the price level. It affects both aggregate demand and aggregate supply. When people are staying at home, they are spending less and so consumption declines. This reduces aggregate demand and AD shifts left. Also there is a reduction in manufacturing as labor services are halted. Limited production results in decreasing aggregate supply. AS shifts left. Combined, these events will cause a multiple decline in real GDP but price level may not change much