Spring of 2020 the world economy experienced a significant decrease in SRAS. That was followed by a decrease in SRAD. Draw those on a graph. What would you expect to happen in your local economy as a result of those shifts? How do you expect the short run and the long run to be related? How long do you expect the short run to be? Why? Will the new long run equilibrium be at a lower level? Why or why not?
I believe that the graphs shown above, taken from chapter 17 of the textbook, demonstrates the actions which were we asked to show. Aggregate Supply (AS) decreases moving A to B with higher prices and lower output. Aggregate Demand (AD) also decreases and an increase in price follows. These actions have created less favorable conditions between balancing unemployment and inflation.
According to the graphs, in the local economy, prices have risen resulting in a tightening of pocketbooks and less discretionary spending. Less spending equates to less jobs and greater unemployment.
Fortunately my local economy is doing quite well with the City of Salida recently reporting its best ever posting of sales tax revenue. This is most likely starkly different from other areas. Salida is a tourist town with nice weather, somewhat local for Coloradoans, and benefited from proactive business leadership.
The relationship between the Long-Run and Short-Run could be very interesting as the Short-Run policies are being pushed longer and the Long-Run repercussions could be artificially held back. COVID -19 has shown to be predicable unpredictable. There will be pent up demand when a vaccine rolls out. This will have a large positive effect on the economy as people and places are slowly and safely opened.
I hope and believe the economy of the US will improve in the coming years and with the new administration. Hopefully within the next year or two a vaccine is widely available to COVID-19 and a reopening world will stimulate growth for years to come. The Long-Run equilibrium may be totally reset, but hopefully within the next four years, the economy that isn't the stock market, will also be floating high.
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