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How would you expect a large decrease in aggregate demand (the Coronavirus demand shock) to affect...

How would you expect a large decrease in aggregate demand (the Coronavirus demand shock) to affect real GDP in the price level? Explain how and why the spread of the Coronavirus is likely to affect consumer and business investment spending and how it will affect aggregate demand? Be specific.

aggregate supply curves are blank for low levels of output, and blank for higher levels of output.

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Answer #1

Answer - As a result of the spread of virus , lockdown was imposed and economic activities were shut down. Hence the umemployment rate rose because of no production in economy. Income fell and hence the consumption also fell. There was no liquidity in maket leading to higher interest rate. The investments fell down due to lack of money and also the lockdown. Consumption and investment , both are components of AD , hence as a result AD fell .

Due to the fall of AD , the price level and the real GDP also fell taking the economy much below the potential level.

2 - Aggregate supply curves are Flat for low level of output and Vertical for high level of output.

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