Transcript Chapter 2 - McGraw-Hill Education Canada


Demand-pull inflation occurs when an
increase in aggregate demand pulls up the
price level
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Chapter 15, LO2
1
AS2
Price Level
ASLR
P3
c
b
P2
P1
AS1
a
AD2
AD1
Qf Q2
Real Domestic Output
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Chapter 15, LO2
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

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
©2013 McGraw-Hill Ryerson Ltd.
Chapter 15, LO2
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
Cost-push inflation arises from factors that
increase the cost of production at each price
level
©2013 McGraw-Hill Ryerson Ltd.
Chapter 15, LO2
4
Price Level
ASLR
AS1
c
P3
P2
AS2
b
a
P1
AD2
AD1
Q2 Q f
Real Domestic Output
LO2
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Chapter 15, LO2
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

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
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Chapter 15, LO2
6
Price Level
ASLR
AS2
a
P1
P2
AS1
b
c
P3
AD1
AD2
Q1 Qf
Real Domestic Output
LO2
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Chapter 15, LO2
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Consumer Goods
Increase in production
possibilities
LO2
Long Run Aggregate
Supply
Price Level
Capital Goods
Productions
Possibilities
©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
Real GDP
Increase in long-run
aggregate supply
18-8 8


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
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Chapter 15, LO2
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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

©2013 McGraw-Hill Ryerson Ltd.
Chapter 15, LO2
10
ASLR1
ASLR2
AS2
Price level
AS1
P2
P1
AD2
AD1
0
Q1
Q2
Real GDP
©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2
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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

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Chapter 15, LO2
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