Monday, December 17, 2007

Revised Response to: Is inflation caused by changes in aggregate demand or aggregate supply?

During the periods of 1979-1982, 1995-1999, and the past four years there has been an inflation that has affected the U.S. economy. Inflation describes an increase in the average price level initiated by excessive aggregate demand. Both supply and demand can cause inflation by either demand increasing too much making high prices or supply decreasing too much causing high prices. What caused this inflation for the past four years is aggregate demand because the CPI, PPI, and GDP deflator for the past four years showing that both demand and supply have increased. But with supply increasing it means that it couldn't have caused inflation because on a graph when supply has increased, the line shifts rightward. What has increased though is demand and that means inflation because the prices has risen. When demand on a graph increases it shifts to the right, meaning it goes upward on the graph meaning that price has increased. In the past four years, the inflation that has occurred was caused by too much demand and not enough production.

No comments: