Problem 1

Suppose that the social distancing measures required to contain the virus reduce household consumption. For simplicity, use the Keynesian consumption function and assume that its autonomous component falls.

1. How will the decrease in household consumption affect planned aggregate expenditure?
2. How will that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 2

Now suppose that federal, state and local governments all respond to the economic impact of the pandemic by increasing their purchases. Suppose further that those governments keep taxes unchanged. To finance the new purchases, governments sell bonds.

1. How would an increase in government purchases affect planned aggregate expenditure?
2. How would that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 3

Next suppose that the US Federal Reserve (i.e. the central bank in the US) responds to the economic impact of the pandemic by conducting open market purchases of government bonds.

1. How would those purchases affect the price of bonds? How would those purchases affect the rate of return on bonds?
2. How would that change in bond yields affect interest rates throughout the economy? And how would those interest rate movements affect planned investment?
3. How would that change in planned investment affect planned aggregate expenditure?
4. How would that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 4

Finally, consider the relationship between output and employment.

1. If social distancing reduces household consumption, what effect will the reduced household consumption have on equilibrium aggregate output and employment?
2. How can fiscal and monetary stimulus affect those levels of equilibrium aggregate output and employment?

I need opinions on these questions.