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This section is Macroeconomic Phenomena in the AD/AS Model
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Macroeconomic Phenomena in the AD/AS Model

Definition

Inflation (respectively, deflation) is a sustained increase (respectively, decrease) in the general price level over a period of time. Disinflation is a slowing of the rate of inflation. Demand pull inflation is inflation caused by sustained or continual increases in aggregate demand. Cost push inflation is inflation caused by sustained or continual decreases in SR aggregate supply.

1) Changes in AD with Stable or Constant SRAS and LRAS

  • Demand pull inflation: AD increases and expansionary gaps result.
  • Recession: AD decreases and contractionary gaps result.

2) Changes in SRAS with Stable or Constant AD and LRAS

  • Cost-push inflation: SRAS decreases and contractionary gaps result.
  • Deflationary expansion: SRAS increases and expansionary gaps result.

3) Simultaneous Changes in AD, SRAS, and LRAS

  • Depression: AD, SRAS and LRAS all decrease simultaneously.
  • Extreme demand pull inflation: AD increases and SRAS decreases by the same magnitude and LRAS remains constant and so the price level increases but real GDP remains constant at the full employment level of real GDP.
  • Deflation: AD decreases and SRAS decreases by the same magnitude and LRAS remains constant and so the price level decreases but real GDP remains constant at the full employment level of real GDP.
  • Inflationary growth: AD, SRAS and LRAS all increase simultaneously but the magnitude of increase in AD is greater than the increases in SRAS and LRAS and so real GDP and the price level increase.
  • Non-inflationary growth: AD, SRAS and LRAS all increase by the same magnitude and so real GDP increases but the price level remains constant.
  • Deflationary growth: AD, SRAS and LRAS all increase but the magnitude of increase in SRAS and LRAS is greater than the increase in AD and so real GDP increases but the price level decreases.
   
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