The coronavirus pandemic has had many negative effects on the U.S. economy. One of these effects is that many businesses are concerned that they may not be able to reopen for several weeks and that, when they do reopen, they may have to operate at a lower capacity than before to maintain social distancing. Suppose that, as a result of these uncertainties, businesses have become less confident in the future and have reduced their desire to invest. (For the purposes of this question, ignore any other potential effects of the pandemic on the U.S. economy.)

a) What is the effect of the decrease in business confidence on the IS and MP curves?

b) According to the IS-MP model, what would happen to output and the real interest rate in the short run? Draw a diagram to help explain your answer.

c) What would happen to consumption, government purchases, and taxes? d) Can you say what would happen to investment? Explain why or why not. (Hint: look at the equation PE = Y to get some insight.)