In a liquidity trap,interest rates fall to nearly zero but this doesn't prevent people saving.In this situation there is a fall in the velocity of circulation and this can cause deflation.In this situation,increasing the money supply will not necessarily cause inflation. y1 y2 y3 y↑→L1y)↑ rl r2 ■1 L1 L2 L3 L m
In a liquidity trap, interest rates fall to nearly zero but this doesn’t prevent people saving. In this situation there is a fall in the velocity of circulation and this can cause deflation. In this situation, increasing the money supply will not necessarily cause inflation. L (m) r y1 O y2 y3 y ↑ → L1 (y) ↑ r1 L1 L2 L3 r2
Main Causes ofiinflation 2.Demand-pul l inflation This occurs when AD increases at a faster rate than AS.Demand pul l inflation will typically occur when the economy is growing faster than the long run trend rate of growth.If demand exceeds supply,firms will respond by pushing up prices
2. Demand-pull inflation This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices. Main Causes of inflation
Y1:Potential GDP;Y2:actual GDP Demand Pull Inflation using AD-AS Diagram 1. Demand-pull inflation GPLI AD1 AD2 occurs when AD grows at AS an unsustainable rate leading a positive output gap (i.e.Actual GDP Potential GDP) GPL2 2. When there is excess demand,producers can GPL1 raise their prices and thereby achieve bigger profit margins 3. Demand-pull inflation is most likely when there is full employment of resources,when aggregate Y1 Y2 Real GDP supply is inelastic
Y1:Potential GDP; Y2: actual GDP
If the economy is at or close to full employment,then an increase in AD leads to an increase in the price level.As firms reach ful I capacity,they respond by putting up prices leading to inflation.Also,near ful I employment with labour shortages, workers can get higher wages which increase their spending power
If the economy is at or close to full employment, then an increase in AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power
P P ADa AD3 AD2 瓶颈现象 AD 0 y yy yf
y PO y f AD 4 P E 3 3 y 1 AS P 1 E 4 AD 1 E 1 E 2 AD 2 P 2 AD 3 P 4 y 2 瓶颈现象