In this assignment, I$$d like you to use what you$$ve learned in class and apply it to past and current macro events. This should give you some practice using the AD$-$AS model as well as help you understand some of the policy debates going on right now.

$1.$ Suppose the U$.$S$.$ economy starts off in long$-$run equilibrium $($label this point as A in the two graphs you$$ll draw below$).$

a$.$ Suppose President elect Trump imposes $25\%$ tariff on imports from Canada and Mexico $($the number $1$ and $2$ U$.$S$.$ trading partners$).$ Assume that this tariff reduces imports from the two countries dramatically and that Canada and Mexico do not impose retaliatory tariffs against the U$.$S$.$ How would this shock impact the AD$-$AS model in the short run and long run? Please illustrate this graphically and state how equilibrium price and output would be affected. Label the short run equilibrium point as B and long run equilibrium as C on the graph.

b$.$ Suppose now that in response to the $25\%$ tariff the U$.$S$.$ imposed, Canada and Mexico implement retaliatory tariffs against the U$.$S$.$ which leads to a dramatic decline in U$.$S$.$ exports to these two countries. Assume that the trade war causes no change in U$.$S$.$ net exports, but the retaliatory tariffs devastate the U$.$S$.$ export industry and ends up reducing U$.$S$.$ productive capacity $($lower potential output$).$ Given this scenario, draw a new graph illustrating how the shocks impact the AD$-$AS model in the short run and long run. For simplicity, assume no change in expected price in the short run. State how equilibrium price and output would be affected. Label the short run equilibrium point as B and long run equilibrium as C on the graph.

$2.$ The coronavirus pandemic has had devastating effect on the world economy in $2020.$ Let$$s make use of the AD$-$AS model to analyze the potential impact of the pandemic on the U$.$S$.$ economy in the following situation:

Suppose the economy starts off in long$-$run equilibrium. To combat the pandemic the government put forth stay at home orders for all citizens. Because people can$$t go out to purchase goods and services, there is a huge drop in consumption.

Let$$s suppose the stay at home order is lengthy enough such that people got used to being self$-$sufficient $($making their own clothes and food, etc.$)$ and the drop in consumption becomes permanent. What is the impact of this on output and price in the short run and in the long run? Illustrate this scenario using the AD$-$AS model just like you did in Question $1$ above $($marking points A$,$ B$,$ and C$),$ and state clearly what happens to P and Y in the short$-$run equilibrium, and then in the long$-$run equilibrium.