Question

Imagine that the Lebanese economy was initially at full employment. COVID-19’s deadly spread delivers a dual (negative) economic shock: a collapse of demand through severely reduced consumption, and a disruption of production and supply chains that is aggravated by infected individuals being unable to work. In response, Banque Du Liban (BDL) intervenes by increasing liquidity to banks in order to assist small- and medium-sized enterprises (SMEs) facing financial constraints. (Hint: treat BDL's decision as an increase in the Money Supply.)

explain the economic impact of the Coronavirus spread in Lebanon. According to the model of aggregate demand and supply (Chapter 10): How will aggregate demand and aggregate supply be affected in the short run (3 pts)?

Answer 1

Lebanon economy will be adversely affected by the Covid-19. Both aggregate demand and aggregate supply shall be affected.

Since after the lockdown, factories have been shutdown and supply chain system have been disrupted, thus supply has been disturbed.

Further consumer confidence is low, so there will be a fall in the aggregate demand as well. Such fall in both aggregate demand as well as supply will cause the stagflation like situation. Predicting actual fall in the demand is difficult to gauge out correctly.

Following is the diagram :

LRASO SRA SRASI SRASO level КАРО A ADI - AD, go 9