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AS/AD diagram for Inflation

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Draw an AS/AD diagram illustrating your answer to the statement below. That is, draw an AS/AD diagram which shows what happens if strong growth in AD has pushed actual RGDP to a level above potential (full employment) RGDP. Be sure to label all lines and axes in your diagram clearly.

If the Inflation rate were to accelerate the economy would be flourishing since there is a need for more people to do the work, this means that the wages will go up, and this will cause inflation rates to also increase accordingly.

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Solution Summary

This solution describes what happens to the AS/AD, unemployment and inflation when strong AD pushes the economy beyond potential.

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The LRAS curve is what happens at Full Employment. It is the maximum quantity that an economy produce without stressing itself. It is vertical because it is at full employment (which is not the same thing as everyone is employed), so there is some flexibility, as we will see, in the short run. Anything to the right of Y is an increase of RGDP ...

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