Draw the economy pre-Covid and the current economic response and state in an AD-AS framework. Use the Keynesian Transmission Mechanism to show the response to monetary policies. Label all components of the graphs.
The Covid-19 has caused the fall in the aggregate demand and aggregate supply both. The supply has shifted to left and demand has declined to down.
The COVID-19 would cause the invariably fall in employment and output.
Following is the diagram:
The expansionary fiscal and monetary policy would further cause a rise in the money supply and interest rate will fall. Fall in the interest rate will increase the aggregate demand in the economy. Again the aggregate demand will shift to Right. again economy will reach the equilibrium level.
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