Expansionary Monetary Policy

Coronavirus pandemic and resultant shutdown measures to contain it have plunged the economy of United States (US) into severe contraction in 2020. As a result, the Fed (central banking system of the US) followed expansionary monetary policy of cutting down the interest rates and managed to restore the economy back to its potential level (Y*) by the end of 2021.a) Assuming, the US economy was at Y* before the start of the pandemic, show the events as described above using the AD-AS model. Also, carefully explain in words (100 or less) stating explicitly any assumptions you may have made here. (4 marks)