demand-pull inflation occurs when an increase in aggregate demand pulls up the price level 1©2013...
TRANSCRIPT
Demand-pull inflation occurs when an increase in aggregate demand pulls up the price level
1©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Real Domestic Output
Pri
ce L
evel
P1
Qf
a
AS1ASLR
AD1
AD2
AS2
c
bP2
P3
Q2
2©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
In the short run, demand-pull inflation drives up prices and output
In the long run, output is restored to GDPf and only the price level is higher
3©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Cost-push inflation arises from factors that increase the cost of production at each price level
4©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Real Domestic Output
Pri
ce L
evel
P1
Qf
a
AS1ASLR
AD1
AD2
AS2
b
c
P2
P3
Q2
LO2 18-5 5©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
If government attempts to maintain full employment, an inflationary spiral may occur
Otherwise, the recession will linger, with high unemployment and a loss of real output
6©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Real Domestic Output
Pri
ce L
evel P1
Qf
a
AS1ASLR
AD1
AD2
AS2
b
c
P2
P3
Q1
LO2 18-7 7©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Pri
ce L
evel
Real GDP
Cap
ital G
ood
s
Consumer Goods
Productions Possibilities
Long Run Aggregate
Supply
Increase in production possibilities
Increase in long-run aggregate supply
LO2 18-8 8©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
How long would it take in the real world for price and wage adjustments to occur to regain full employment?
There is disagreement among economists
9©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Modern economies tend to experience positive rates of inflation due to
Economic growth causing rightward shifts of the AS curve
Central banks then cause rightward shifts of the AD curve so that it proceeds just a little faster than the deflationary rightward shifts of the AS curve
The net effect is (usually) a small positive rate of inflation
10©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
P1
P2
Q2Q10
Pri
ce level
Real GDP
ASLR1 ASLR2
AS1
AS2
AD1
AD2
11©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Economic growth causes increases in long-run aggregate supply
Whether deflation, or inflation accompanies growth depends on the extent to which aggregate demand increases relative to aggregate supply
Any inflation that occurs is the result of growth of aggregate demand
It is not the result of the growth of real GDP
12©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2