After you have studied Economics in the News on pp. 708–709, answer the following questions.

a. What were the main features of the U.S.

economy in the first quarter of 2020? Did the United States have a recessionary gap or an inflationary gap? How do you know?

b. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in the second quarter of 2020.

c. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in the third quarter of 2020.

d. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that would have occurred without the federal government’s Covid stimulus.

e. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that would occur if the federal government’s stimulus was exactly the right size to restore full employment.

f. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that would occur if the federal government’s stimulus was too large and brought an inflationary gap. Show the short-run and the long-run effects.

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When the coronavirus hit the United States in March 2020, social interaction restrictions delivered a large negative shock to the economy. In the second quarter, April through June, real GDP shrank at a record 31.4 percent annual rate and the price level, measured as the GDP deflator, fell by 0.5 percent. But as the news article reports, the economic collapse was short lived. In the third quarter, July through September, real GDP grew at a record 33.4 percent and the price level (GDP deflator) rose by almost 1 percent. (trillions of 2012 dollars) Real GDP 19.2. 18.8. 18.40 18.0 17.60 17.20 Real GDP crash and V-shaped recovery Price level rises by more than it falls in Covid-19 recession 2020/Q1 Year/quarter Figure 1 A V-Shaped Recession and Recovery 2020/Q2 114.0 113.8 8 113.6 113.4 113.2 113.0 112.8 112.6 2020/Q3 (GDP deflator, 2012 = 100) Price level