Chapter 12 The pandemic: economic black magic III
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Chapter 12 summarizes the effects of the COVID-19 pandemic on the US economy. It points out that fear had a greater negative effect on output than occurred via government mandates. Also, fear initiated a ‘run to cash’, which is typical. Much of this was hoarded, thereby causing the velocity of money to decrease precipitously. The chapter explains how fear affected the stock market, especially in March of 2020. Within a few months in the spring of 2020, real GDP decreased more, and the unemployment rate increased more than at any time since WWII. However, the stock market and the economy turned around rather quickly. Initially, the inflation rate stayed relatively low, but prices began to rise progressively faster after roughly one year of the rebound. By 2022 the inflation rate was the highest in roughly 40 years. This chapter suggests that the high inflation rate is an example of negative economic hysteresis. The pandemic induced the government to increase the money supply rapidly. Initially, much of this increase was hoarded, thereby keeping inflation low. However, as of around the spring of 2021 aggregate demand increased rapidly as people started to spend the extra cash that they had accumulated. Also, the pandemic generated a decrease in potential output for two reasons. First, hundreds of thousands of firms shut down, and apparently this was permanent for some of them. Thus, the useful capital stock declined. Second, the labor supply decreased for several reasons, one of which was a significant increase in early retirements. As of the summer of 2022, the labor force was probably three million workers smaller than it would have been without the coronavirus pandemic. Together, the increase in aggregate demand and decrease in aggregate supply contributed to the much higher prices. It might be impossible to determine the relative importance of these two influences on recent inflation.

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