Macroeconomics IA Structured Outline

‘Lebanon’s actual inflation soars to 155.4% in February’

https://www.thenationalnews.com/business/economy/lebanon-s-annual-inflation-soars-to-
155-4-in-february-1.1202991

1. Key words (150 words)

- Inflation: A persistent increase in the general price level of an economy over a certain
period of time.
o Cost push inflation: a type of inflation caused by a decrease in SRAS, hence
causing a leftward shift in SRAS curve.
 cost push inflation is more serious than demand-pull inflation, as it leads
to a fall in RGDP while the price level is increasing.  Stagflation

- CPI (Consumer Price Index): a measure that examines the weighted average of prices of
a basket of consumer goods and services, such as transportation, food, and medical
care. It is calculated by taking price changes for each item in the predetermined basket
of goods and averaging them.

- Contraction: a phase of the business cycle in which the economy is in decline.

RGDP decreases (negative growth), cyclical unemployment increases
o If contraction lasts for more than two quarters, it is considered as recession.

2. Diagrams and explanations (200 words)

<cost-push inflation>
- Leftward shift in the AS curve from AS1 to AS2
o “due in part to the inability of authorities to monitor and contain prices, as well
as to the deterioration of the exchange rate, which has encouraged some
opportunistic wholesalers and retailers to raise the prices of consumer goods
disproportionately,” – chief economist of Byblos bank (third largest Lebanese
bank)
 Resulting in a lower RGDP (Q1Q2) and higher prices (P1P2)

<countering cost-push inflation>

- Supply side policies are utilized
o AD shifts rightwards from AD to AD*
 The new equilibrium is (P1,Y*)
 Y* is lower than the initial output and Y2, but it is at a lower price level
 Still problematic due to rising levels of unemployment and lower
economic growth in the SR

3. Explanation further developed (100 words)

- Leftward shift in the AS curve from AS1 to AS2

o Inflation soared an annual 155.4% in February 2021
o “eight consecutive triple-digit increase of the central administration of statistics’
CPI since July 2020”
 “index increased 4.46% from January 2021”
 “due in part to the inability of authorities to monitor and contain prices,
as well as to the deterioration of the exchange rate, which has
encouraged some opportunistic wholesalers and retailers to raise the
prices of consumer goods disproportionately,” – chief economist of
Byblos bank (third largest Lebanese bank)
 Resulting in a lower RGDP (Q1Q2) and higher prices (P1P2)
o Currency depreciation – “lost as much as 90 per cent of its value against the US
dollar in the black market”

4. Evaluation of solution (300 words)

- Implementation of contractionary demand-side policies

o Contractionary fiscal (G down, T up)
 Time delays, possible political interference
  Lebanon political stability low
o Contractionary monetary (IR up  C down, I down)
 Higher IR may affect AD after time lag
 Decrease in C, poverty
o Possible drawbacks:
 They are often used, however while they can lower inflation, they make
recession even deeper.
 Not applicable for the Lebanese economy

- Implementation of supply-side policies

o Possible drawbacks:
 Often controversial, difficult to implement
 Take very long to take effect in an economy (time lags)
o However, successful supply side policies will shift AS to the right
 Taxes can be decreased
 Central banks can implement contractionary monetary policies
 Achieved by increasing interest rates
 consequences would be high unemployment and a fall in
output (GDP)
 Lebanon’s political instability