Let's assume that the economy was operating at full employment before the pandemic. However, when the...

Transcribed Image Text:

Let's assume that the economy was operating at full employment before the pandemic. However, when the pandemic hit, many parts of the economy shut down, causing a decrease in labor demand and consumer income, resulting in increased savings and decreased demand for goods and services. To understand the impact of the pandemic, we need to use a model that walks us through several steps. 1). Firstly, assume the economy is at full employment, and let's illustrate the general equilibrium by showing the intersection of the IS and LM at the full employment level of output on the FE line. Next, we need to show the shift in the IS curve and AD curve, which will result in a new short-run level of output. It's important to note that the FE curve remains fixed, indicating our desired level of full employment output or potential output, even though labor demand temporarily decreases. You need to show the shifts on the graph and explain these shifts. 2). Moving on to part 2, let's start with the answer from part 1 and illustrate how the economy could, in theory, move back towards the full employment level of output if all markets responded quickly. As the economy returns to its full employment level, we can expect the price level, interest rates, and output to change. However, we need to keep in mind that this is theoretical, and the actual response may differ. Let's assume that the economy was operating at full employment before the pandemic. However, when the pandemic hit, many parts of the economy shut down, causing a decrease in labor demand and consumer income, resulting in increased savings and decreased demand for goods and services. To understand the impact of the pandemic, we need to use a model that walks us through several steps. 1). Firstly, assume the economy is at full employment, and let's illustrate the general equilibrium by showing the intersection of the IS and LM at the full employment level of output on the FE line. Next, we need to show the shift in the IS curve and AD curve, which will result in a new short-run level of output. It's important to note that the FE curve remains fixed, indicating our desired level of full employment output or potential output, even though labor demand temporarily decreases. You need to show the shifts on the graph and explain these shifts. 2). Moving on to part 2, let's start with the answer from part 1 and illustrate how the economy could, in theory, move back towards the full employment level of output if all markets responded quickly. As the economy returns to its full employment level, we can expect the price level, interest rates, and output to change. However, we need to keep in mind that this is theoretical, and the actual response may differ.

Answer rating: 100% (QA)

In this scenario lets walk through the steps using the ISLM model to understand the impact of the pandemic on the economy 1 Initial Full Employment Eq... View the full answer