Question

As of January 1, 2020 (before the rapid spread of the Coronavirus) was the United States economy operating in the Keynesian, intermediate, or neoclassical portion of the economy’s Short Run Aggregate Supply Curve? Explain your answer carefully using the data and information that you have gathered regarding real GDP, unemployment, the GDP deflator, and inflation in the previous discussions. You should discuss the concepts of potential GDP and the natural rate of unemployment to receive full credit.

Answer 1

Before the spread of pandemic, the economy was operating at its potential level. The unemployment rate was below the natural rate of unemployment. The inflation rate was close to the 2 %.

Everything was going smoothly before the advent of the pandemic. The classical economists presume the output that corresponds to full employment. While the Keynesian range is below the potential level. The supply curve is horizontal in the Keynesian range and there is any price rise in this range.

The pandemic period is characterized by the Keynesian range. Economy is operating below the full potential level.

Therefore, the output and economic conditions before the pandemic corresponds to the classical range. Classical range presumes that there is no use of raising the aggregate demand.