 Demand-pull inflation occurs when an increase in aggregate demand pulls up the price level 1©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2.

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 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 Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 c b P2P2 P3P3 Q2Q2 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 GDP f 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 Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 b c P2P2 P3P3 Q2Q2 LO ©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 Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 b c P2P2 P3P3 Q1Q1 LO ©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO2

Price Level Real GDP Capital Goods Consumer Goods Productions Possibilities Long Run Aggregate Supply Increase in production possibilities Increase in long-run aggregate supply LO ©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

P1P1 P2P2 Q2Q2 Q1Q1 0 Price level Real GDP AS LR1 AS LR2 AS 1 AS 2 AD 1 AD 2 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