Inflation

• Concept: Inflation happens when aggregate demand (AD) rises faster than aggregate supply (AS).
• Types:
  • Demand-pull (too much demand).
  • Cost-push (higher production costs).

Example:

• If government increases spending → AD curve shifts right.
• Output rises, but prices also rise (inflation).

Graph:

• AD (downward) & AS (upward).
• Rightward shift in AD → higher price level & output.

Key Insight: Inflation = excess demand or rising costs.