Using the AD-AS model (short-run and long-run AS) and the Aggregate Expenditure (AE) model and assuming the Singapore economy was at the natural rate of output at the onset of the crisis:Illustrate the impact of the crisis on the domestic economy using both the AD-AS model and the AE model. Ensure you clearly label all parts of the diagram, clearly demonstrating the original equilibrium and the COVID-19 outcome equilibrium. (HAS BEEN ANSWERED IN THE PICTURES ATTACHED)Discuss your rationale for the outcome you have demonstrated in your diagrams, ie discuss which components of AD/AS/AE have been affected and why - the basis of the shifts you demonstrated in the diagrams. In AE model, a decrease in consumption decreases aggregate expenditure, shifting the AEcurve downward. This decreases equilibrium income.In following graph, planned aggregate expenditure (PAE) and real GDP (Y) are measuredvertically and horizontally respectively. Initial Equilibrium is at point A where 45° lineintersects initial aggregate expenditure curve PAEO, with equilibrium GDP YO and plannedaggregate expenditure E0.When consumption spending falls from Co to C1, the PAEO line shifts down to PAE1. NewEquilibrium is at point B where 45° line intersects new planned aggregate expenditure curvePAE1, with lower equilibrium GDP Y1 and lower planned aggregate expenditure E1.PAE450PAEOEoCoPAEIB.E The COVID crisis reduces consumption demand, which decrease aggregate demand, whichshifts AD curve leftward. Price level decreases, real GDP & output decreases andunemployment rate increases in short run.In following graph, ADO, LRASO and SRASO are initial aggregate demand, long-run aggregatesupply and short-run aggregate supply curves intersecting at point A with initial price level POand real GDP (equal to potential GDP) Yo.A decraese in aggregate demand shifts ADO left to AD1, intersecting SRASO at point B withlower price level P1 and lower real GDP Y1 in short run.PLRAS.SRASOPoADOADI

Due to COVID, the consumption expenditure of the economy declined, leading to the overall decline in…

Answered: Using the AD-AS model (short-run and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Using the AD-AS model (short-run and long-run AS) and the Aggregate Expenditure (AE) model and assuming the Singapore economy was at the natural rate of output at the onset of the crisis:

Illustrate the impact of the crisis on the domestic economy using both the AD-AS model and the AE model. Ensure you clearly label all parts of the diagram, clearly demonstrating the original equilibrium and the COVID-19 outcome equilibrium. (HAS BEEN ANSWERED IN THE PICTURES ATTACHED)
Discuss your rationale for the outcome you have demonstrated in your diagrams, ie discuss which components of AD/AS/AE have been affected and why - the basis of the shifts you demonstrated in the diagrams.

In AE model, a decrease in consumption decreases aggregate expenditure, shifting the AE
curve downward. This decreases equilibrium income.
In following graph, planned aggregate expenditure (PAE) and real GDP (Y) are measured
vertically and horizontally respectively. Initial Equilibrium is at point A where 45° line
intersects initial aggregate expenditure curve PAEO, with equilibrium GDP YO and planned
aggregate expenditure E0.
When consumption spending falls from Co to C1, the PAEO line shifts down to PAE1. New
Equilibrium is at point B where 45° line intersects new planned aggregate expenditure curve
PAE1, with lower equilibrium GDP Y1 and lower planned aggregate expenditure E1.
PAE
450
PAEO
Eo
Co
PAEI
B.
E

The COVID crisis reduces consumption demand, which decrease aggregate demand, which
shifts AD curve leftward. Price level decreases, real GDP & output decreases and
unemployment rate increases in short run.
In following graph, ADO, LRASO and SRASO are initial aggregate demand, long-run aggregate
supply and short-run aggregate supply curves intersecting at point A with initial price level PO
and real GDP (equal to potential GDP) Yo.
A decraese in aggregate demand shifts ADO left to AD1, intersecting SRASO at point B with
lower price level P1 and lower real GDP Y1 in short run.
P
LRAS.
SRASO
Po
ADO
ADI

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