3.3.4 3.3.5 MACROECONOMIC CONFLICTS 3.4

IS AN INCREASE IN AD ALWAYS INFLATIONARY?

• NOT ALWAYS! In the KEYNESIAN MODEL, when the economy is in a DEFLATONARY GAP and operating on the HORIZONTAL SECTION of its AS curve (When there is a lot of SPARE CAPACITY) an increase in POTENTIAL GROWTH shifts the AD curve to the right, but to a level of output that is STILL below FE, so we can say there is NO CONFLICT. 

• However in the MONETARIST MODEL, when the economy is in a DEFLATONARY GAP any increase in AD results in a HIGHER PRICE LEVEL, so we can say there is always a CONFLICT.

• True to BOTH MODELS is the fact that if the output level was to EXCEED FE then it would ALWAYS be INFLATIONARY and hence in CONFLICT

COST-PUSH INFLATION causes a DECREASE IN ECONOMIC ACTiVITY, therefore they are NOT IN CONFLICT, as this type of inflation is NOT at the expense of HIGHER GROWTH.