All experts agree that the economy is currently at its SR and LR equilibrium. A discovery of a new variant of virus that has the potential to be more contagious than the previously discovered variants of this deadly virus has shattered the confidence of the businesses and households. While the government has not yet ordered (and repeatedly said that they will not order) a shutdown of the economy as it has done previously, the credibility of the government is at an all time low and the possibility of a new lockdown is one of the major reasons behind the huge decreases in the business and consumer confidence.

Using a carefully labeled diagram, show the current equilibrium for this economy and the new equilibrium following the discovery of the new variant of the virus. Carefully discuss what will happen to the output, unemployment, price level, and inflation in the short run. Design a monetary policy that will assist the economy in recovering from this crisis. You may assume that the lockdown will not be imposed by the government. Describe your proposed policy in as much detail as you can and use a new diagram to show the before/after effects of your proposed policy. Assuming your policy achieves its policy goal, discuss what will happen to the output, unemployment, price level, and inflation.