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AD AS, POLICY - Coggle Diagram
AD AS
AD
What shifts AD
Spending
Inflation: RBA raises real interest rate to decrease inflation
Does the component increase or decrease Equilibrium output at each level of inflation?
What causes movement
changes in inflation
Why AD is downward sloping (4)
INFLATION
What determines inflation?
output gap: no shift in AD initially
0: inflation rate remains unchanged
expansionary: inflation rate increases as they will increase their prices by more than the increase in their costs-> n the general price level will begin to rise more rapidly
contractionary: incentive to cut prices to sell more, inflation decreases
This process of falling inflation, falling real interest rates, rising output, and falling unemployment continues, until the economy reaches full employment
shock to potential output
Excessive spending: AD shifts
increase in govt spending :arrow_up: inflation. This can be offset by RBA increases real interest rate
Inflation shock: sudden change unrelated to output gap. initially, the economy is at equilibrium, the adverse shock shifts SRAS up -> new short run equilibrium point, inflation rises. There will be a contractionary gap again,...
If no action is taken, the economy may have to go through deep recession -> need expansionary policy
energy, food prices increase large enough
What affects the actual rate of inflation
Inflation expectation/ inflation intertia
existence long term wages and price contract
Self correction
Inflation adjusts gradually to bring the economy into long run equilbrium
POLICY
Policy and inflation shock
Accommodating: allows the effects of a shock to remain
The speed of SRAS depends on public's expectation of RBA acts
Maintaining inflation or stabilising output?
Fiscal policy
spending
taxes: income tax, lower marginal tax rate
OC of working extra hours
Policy and demand shock
Not a hard choice
Fiscal or mon pol