Answer to Question #259989 in Macroeconomics for shon

Question

It is sometimes argued that economic growth that is “too rapid” will be associated with inflation. Use AD-AS analysis to show how this statement might be true. When this claim is made, what type of shock is implicitly assumed to be hitting the economy

Answer 1

The type of shock that is implicitly assumed to be hitting the economy is positive demand shock. A positive demand shock happens due to a sudden increase in the demand as a result of increase in the purchasing power of consumers. This happens because of the increase in velocity of supply and also due to some of the positive reforms to grow the economy( by decrease in interest rates, taxes, public expenditure etc).

The result is that the AD curve shifts to the right side to AD1