1)Suppose Covid-19 was a pure negative Aggregate Supply shock (decrease in productivity) and consider its economic effects on Germany.

1A) Use the AD/AS model to predict the effects of Covid-19 on German output, prices, employment, and unemployment. How must fiscal policy respond if the government's target is full employment? How will this policy change your answer about prices, employment, and unemployment?

1b) Germany is an open economy and uses the euro (). Consider the open-economy IS/LM model and assume the euro is freely floating against the US dollar ($). What will be the effects of the German fiscal policy on German output and interest rates, the /$ exchange rate, and on US output and interest rates? How would your exchange rate answer change if the Fed responds by tightening monetary policy?

1C) Use the Solow model to predict the effects of the Covid shock on the German steady-state income per capita, assuming the decrease in productivity is permanent. How does your answer change if you take into account the fiscal policy of (1.a) [Hint: what is the policy's effect on the German national saving rate?]