"COVID-19 Impact on Economy"

Assume the economy of country A is in a long-run equilibrium with full employment. The

nominal wage of workers are fixed in the short run.

a) Draw a graph which shows the short-run aggregate supply, long-run aggregate supply,

and aggregate demand. Describe the equilibrium point and show each of the following:

i) Equilibrium output, labelled Y1

ii) Equilibrium price level, labelled P1.

b) Owing to the outbreak of COVID19, the export market of country A has decreased. On

your graph in part a), describe in details on the effect of lower export on the equilibrium

in the short run, labelling the new equilibrium output and price level Y2 and P2,

respectively.

c) Based on your result in part b), what is the impact of lower export on real wages in the

short run? Explain.

d) Show, with a new graph, how the economy will return to its new equilibrium in the long

run if the government does not intervene. Explain.

e) Suppose the government decides to increase expenditure on new equipment.

(i) What component of aggregate demand will change? Explain.

(ii) What is the impact on the long-run aggregate supply? Explain.