There are numerous factors driving supply-and-demand changes. This, in turn, leads to changes in the inflation level. This can also at times cause deflation. Deflation is when the general prices tend to decrease in a basket or the broader economy. We will explore inflation by looking at aggregate demand (AD) and aggregate supply (AS):
Figure 5.1: AD curve
In Figure 5.1, we can see that the aggregate supply is constant. When the aggregate demand in the GDP is at AD1, the price is P1. But as the AD increases to AD2, the price moves to P2. The percentage change in price is (P2-P1)/P1. The intersection of AD1 and AS resulted ...
