Covid-19 crisis reveals surprising impact of supply and demand shocks.
The article examines how the Covid-19 crisis affected the economy by looking at supply and demand shocks in different sectors. Negative supply shocks lead to stagflation, while negative demand shocks cause deflation. Both can result in unemployment. Complementarities in production can amplify the impact of supply shocks but lessen the effects of demand shocks. In the US, both types of shocks contributed equally to the decrease in real GDP from February to May 2020. Despite high unemployment, it was concentrated in specific markets, making aggregate demand stimulus less effective compared to typical recessions.