1. Suppose the economy is at the long-run equilibrium when suddenly a global pandemic causes consumers...

  

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1. Suppose the economy is at the long-run equilibrium when suddenly a global pandemic causes consumers to reduce their demand for many final products and services. (a) Describe and illustrate the short-run effects on the price level, real GDP, and employment. (b) Assuming government does not intervene to fix the problem, describe and illustrate the impact on the price level, real GDP, employment, and wages in the long-run. HINT: To answer this question, begin your answer with the graphs in your answer to part (a) (just duplicate your graphs in the answer to (a)). Then add to these graphs the long-run effects. (e) Given the state of the economy in the short-run (answer to problem (a)), suggest a change in government spending to reverse the problem without waiting for convergence to long-run equi- librium. Illustrate the short-run impact of this policy on price level, real GDP, and employment. Compared to the original long-run equilibrium, what happened to the price level and real GDP as a consequence of your government policy? HINT: To answer this question, begin your answer with the graphs in your answer to part (a) (just duplicate your graphs in the answer to (a)). Then add to these graphs the long-run effects. 1. Suppose the economy is at the long-run equilibrium when suddenly a global pandemic causes consumers to reduce their demand for many final products and services. (a) Describe and illustrate the short-run effects on the price level, real GDP, and employment. (b) Assuming government does not intervene to fix the problem, describe and illustrate the impact on the price level, real GDP, employment, and wages in the long-run. HINT: To answer this question, begin your answer with the graphs in your answer to part (a) (just duplicate your graphs in the answer to (a)). Then add to these graphs the long-run effects. (e) Given the state of the economy in the short-run (answer to problem (a)), suggest a change in government spending to reverse the problem without waiting for convergence to long-run equi- librium. Illustrate the short-run impact of this policy on price level, real GDP, and employment. Compared to the original long-run equilibrium, what happened to the price level and real GDP as a consequence of your government policy? HINT: To answer this question, begin your answer with the graphs in your answer to part (a) (just duplicate your graphs in the answer to (a)). Then add to these graphs the long-run effects.

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In the short run a reduction in consumer demand due to a global pandemic would have several effects ... View the full answer