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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

How is pressure for inflationary price increases shown in an AD/AS model?

To determine

Impact of Inflationary price on AD/AS model is to be determined.

Explanation

Inflation means persistent increase in price level of economy. General increase in price level leads to inflation.

Inflation occurs due to two conditions:

  1. Shift of AD curve to the right when economy is nearly at its potential output growth.
  2. AS shifts leftward.

In the above diagram, Output is measured on x-axis and price is measured on y-axis.

Initially economy is at its equilibrium E 1 with the intersection of AD1 and SRAS curve. As economy is near to potential output level, with the rightward shift of AD curve from AD1to AD2, this leads to increase in output but higher increase in price level...

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