Question.2924 - Think about some industry or type of firm that you have knowledge about and explain how that industry was affected by COVID-19. Then explain how this impact could demonstrated in our AD/AS model. For simplicity, assume that Real GDP (output) was equal to Potential GDP (LRAS) before the pandemic. [4 points] Did AD or AS shift? In what direction? [4 points] How was the equilibrium impacted? Did Real GDP increase or decrease? What happened to the price level? [4 points] How does the model predict unemployment to change? [4 points] As a part of your discussion, include a graph of the AD/AS model that shows the changes you identified and illustrates a new equilibrium as a result of the change.
Answer Below:
The Covid-19 pandemic had an impact on numerous industries. The airline industry was one sector that suffered the most. Before the pandemic, the airline sector saw a consistent increase in both passenger volume and revenue (Bouwer et al., 2022). On the other hand, the pandemic breakout reduced passenger demand caused several aircraft cancellations and caused travel restrictions. The aggregate demand (AD) and supply (AS) shift towards the left since consumer spending on non-essential goods and services and the supply chain decreased (in, 2019). The intersection of new AD and AS results in a lower GDP level with a price fall. In Figure 2, the intersection of the new AS and AD results in a price rise. As the supply decreases, the demand for the quantity increases, and as the demand falls, the price level falls. From the two figures, we can observe that the real GDP is less than the potential GDP ( LRAS ), leading to a higher unemployment level as the industry reduces its workforce in response to lower production costs. References ?Bouwer, J., Krishnan, V., Saxon, S., & Tufft, C. (2022, March 31). Taking Stock of the Pandemic’s Impact on Global Aviation. McKinsey & Company. https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/taking-stock-of-the-pandemics-impact-on-global-aviation in. (2019). Lesson summary: Changes in the AD-AS model in the short run. Khan Academy. https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/macro-changes-in-the-ad-as-model-in-the-short-run/a/lesson-summary-changes-in-the-ad-as-model-in-the-short-run ?More Articles From Economics
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