Aggregate Demand And Supply Plotted Against Inflation
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Inflation Targets and ADI / ASI Analysis
ADI and ASI analysis
An inflation target and the ADI curve
AD plotted against inflation
Assume an inflation . target of Ptarget
Rate of inflation (P)
.
.P
target
Aggregate demand plotted against inflation
ADI O
Y1
National income
ADI and ASI analysis
Equilibrium and the effect of a rise in aggregate demand
AD and AS plotted against inflation
.
Rate of inflation (P)
ASI
The rise in ADI causes a temporary rise in national income and inflation
.P
.P
2
b a
c
target
ADI2 ADI1 O
Y1
Y2 Y3
National income
AD and AS plotted against inflation With inflation at b being above the target, the target rate of interest is raised. Economy moves back to point a.
Rate of inflation (P)
.
.P
.P
2
ASI
b a
target
ADI2 ADI1 O
Y1
Y2
National income
ADI and ASI analysis
Effect of an increase in aggregate supply: (a) a temporary increase
The effects of a increase in aggregate supply (a) a temporary increase in aggregate supply ASI1 Rate of inflation (P)
.
.P
.P
target
a b
2
ADI1 O
Y1 Y2
National income
ASI2
ADI and ASI analysis
Effect of an increase in aggregate supply: (b) a permanent increase
The effects of a increase in aggregate supply (b) a permanent increase in aggregate supply ASI1 Central bank cuts target interest rate
Rate of inflation (P)
.
.P
.P
target
c
a b
2
ADI2 ADI1 O
Y1 Y2
Y3
National income
ASI2
ADI and ASI analysis
ADI curves based on different Taylor rules
ADI curves based on different Taylor rules Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation
Rate of inflation (P)
.
.P
1
b
.P
a
target
ADI1
O
Y1
Y0
National income
ADI curves based on different Taylor rules Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation Curve ADI2: based on Taylor rule giving relatively high weight to stable real national income
Rate of inflation (P)
.
.P
1
b
c
.P
a
target
ADI1 ADI2 O
Y1
Y2
Y0
National income
ADI and ASI analysis
An inflation target and the ADI curve
AD plotted against inflation
Assume an inflation . target of Ptarget
Rate of inflation (P)
.
.P
target
Aggregate demand plotted against inflation
ADI O
Y1
National income
ADI and ASI analysis
Equilibrium and the effect of a rise in aggregate demand
AD and AS plotted against inflation
.
Rate of inflation (P)
ASI
The rise in ADI causes a temporary rise in national income and inflation
.P
.P
2
b a
c
target
ADI2 ADI1 O
Y1
Y2 Y3
National income
AD and AS plotted against inflation With inflation at b being above the target, the target rate of interest is raised. Economy moves back to point a.
Rate of inflation (P)
.
.P
.P
2
ASI
b a
target
ADI2 ADI1 O
Y1
Y2
National income
ADI and ASI analysis
Effect of an increase in aggregate supply: (a) a temporary increase
The effects of a increase in aggregate supply (a) a temporary increase in aggregate supply ASI1 Rate of inflation (P)
.
.P
.P
target
a b
2
ADI1 O
Y1 Y2
National income
ASI2
ADI and ASI analysis
Effect of an increase in aggregate supply: (b) a permanent increase
The effects of a increase in aggregate supply (b) a permanent increase in aggregate supply ASI1 Central bank cuts target interest rate
Rate of inflation (P)
.
.P
.P
target
c
a b
2
ADI2 ADI1 O
Y1 Y2
Y3
National income
ASI2
ADI and ASI analysis
ADI curves based on different Taylor rules
ADI curves based on different Taylor rules Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation
Rate of inflation (P)
.
.P
1
b
.P
a
target
ADI1
O
Y1
Y0
National income
ADI curves based on different Taylor rules Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation Curve ADI2: based on Taylor rule giving relatively high weight to stable real national income
Rate of inflation (P)
.
.P
1
b
c
.P
a
target
ADI1 ADI2 O
Y1
Y2
Y0
National income
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