2 a. (30 points) Aggregate supply, aggregate demand, Covid-19, and inflation (5 points) In a diagram, plot all curves for aggregate demand and aggregate supplies by labelling them. You can use, for instance, ADO for the initial demand. For long-run curves, use the superscripts LR, such as ASER (assume short run aggregate supply is horizontal). We assume that the initial equilibrium is the longrun equilibrium; label it with letter A. Don't forget to label both axis of the diagram. Following the outbreak of the Covid-19 pandemic, government needed to joggle with the implementation of economic and health policies at the same time. Let's consider only one measure: lockdowns. In the following four questions, we'll analyze lockdowns extending for some months. b. (5 points) Would aggregate demand be affected? If so, how? Explain any shift and the underlying economic rationale by considering that most of us had to stay at home. If needed, plot in the previous diagram and label any new curve using the subscript as in AD1. (5 points) Would aggregate supply be affected? If so, how? Explain any shift and the underlying economic rationale by taking into consideration that people could not go to work and some people needed to quarantine while infected with Covid-19. If needed, plot in the previous diagram and label the new curve as A51. The new (short-run) equilibrium (label it with the letter B on your diagram) describes a decline in aggregate income with a moderate impact on prices. Point B is the situation that we all thought described the situation around end 2020. The new (short-run) equilibrium (label it with the letter B on your diagram) describes a decline in aggregate income with a moderate impact on prices. Point B is the situation that we all thought described the situation around end 2020. d. (5 points) Consider yourself as the policymaker of your country for the extent of this exercise, what would you aim at doing at this situation and why? Let's assume that policymakers aimed at countering the situation only through expansionary fiscal policies. Ports around the world have experienced numerous bottlenecks that are increasing the cost of transportation and having a long-lasting effect on aggregate supply. In fact, due the increase in transport and production prices, the long-run supply has now shifted and passes by point B. (10 points) Plot now the expansionary fiscal policy at the end of 2020 which aimed at incentivizing the aggregate demand, you can label it as ADZ if needed. Find the new short-run equilibrium, label it with the letter C and describe change with respect to the previous equilibrium (point B). What do you expect for prices in the long-ru n