ECON102 Lecture Notes - Lecture 7: Opportunity Cost, Aggregate Supply, Output Gap

• School: University of Waterloo
• Department: Economics
• Course: ECON102
• Professor: Maryann Vaughan

Document Summary

In the long run, inflation occurs if the quantity of money grows faster than potential gdp. In the short run, many factors can start an inflation, and real gdp and the price level interact. To study these interactions, we distinguish two sources of inflation: An increase that starts because aggregate demand increases is called demand-pull inflation. Can begin with any factor that increases aggregate demand. C+i+g+x-m (any change in these savings plans can shift aggregate demand, and have an initial effect) Initial effect of an increase in aggregate demand. Figure 28. 3 (a) illustrates the start of a demand-pull inflation o o o o o o o. Starting from full employment, an increase in aggregate demand shifts the ad curve rightward. Price level rises, real gdp increase, and an inflationary gap arises. The rising price level is the first step in the demand-pull inflation. The initial effect is the increase in real gdp and the increase in price level.