Draw a diagram showing the economy in long run equilibrium. You should draw the aggregate demand curve, the short run aggregate supply curve and the long run aggregate supply curve. What happens in the short run when the economy suffers a negative supply shock? (Illustrate in the diagram and explain).

(a) Explain what will happen to aggregate demand if many people lose their jobs and households decide to save a larger share of their income due to the pandemic.

(b) If the government reduces taxes and increases spending what will happen to the aggregate demand curve.