The COVID-19 pandemic was having a devastating effect on the U.S. economy in the second quarter of 2020, but its effects were already visible in the Bureau of Economic Analysis (BEA) report of U.S. GDP in the first quarter. Real GDP decreased and the price level rose. In this post, we explain what happened using the aggregate supply-aggregate demand model.
What happened to short-run aggregate supply?
Government regulations limited the number of people who could work when health professionals recommended social distancing. The substantial decrease in the number of hours worked in the U.S. decreased short-run aggregate supply.
What happened to aggregate demand?
Investment, plus government expenditure, plus exports decreased by $140 billion. At the same time, uncertainty and a decrease in income decreased consumption expenditure by $230 billion. Imports decreased by $140 billion. Aggregate demand decreased.
What happened to real GDP?
After the outbreak of COVID-19, short-run aggregate supply and aggregate demand decreased. Real GDP decreased by $240 billion or $0.2 trillion.
What happened to the price level?
When short-run aggregate supply and aggregate demand decrease, the price level can rise, fall, or remain unchanged. In the first quarter of 2020, the BEA reported a rise in the price level, so the decrease in short-run aggregate supply exceeded the decrease in aggregate demand.
Let’s look at the AS-AD model of the U.S. economy.
Now take a short quiz to check that you understand what you just read.
Multiple Choice Test: Aggregate Effects of COVID-19