91影视

Inflation refers to the sustained increase in the general price level. It leads to a decline in the value of money.

The diagram which suggests how the lags in policy implementation results in unpredictable fluctuations, is as follows:

Where,

- LRAS is the long run aggregate supply

- SRAS is the short run aggregate supply

- AD is the aggregate demand

- E is the equilibrium point.

Assume the financial system is in a recession at point E, and policymakers want to maintain output stability. With the provided assumption about the economy, policymakers may also want to devise a strategy to shift the aggregate demand curve rightwards at AD₁ in order to stabilize the economy. However, lags in the economy may make it more difficult to implement the new policy. If the financial system begins to recover before the new policy is implemented, aggregate demand could be increased beyond its potential production as soon as the policy is implemented.

If the aggregate demand expands beyond its possible output at E1, it will result in higher inflation than planned. If policymakers attempt to rectify this issue once inflation rises, they will have to tighten monetary policy. Aggregate demand will shift leftwards lower back to AD₁, an excellent way to raise the unpredictability of inflation and output once more.