ECONOMIC

GROWTH AND
INFLATION
(ONE EXAMPLE OF POSSIBLE
MACRO POLICY CONFLICTS)
• ECONOMIC GROWTH:

• INFLATION:

If there is rapid economic growth, it will put pressure

on inflation rate to increase.
ECONOMIC GROWTH VS INFLATION
• A higher inflation rate (large rise in
prices) is often caused by strong
economic growth.
• It occurs when Aggregate Demand
increases faster than Aggregate
supply.
• If demand is rising faster than than
supply, this suggests that economic
growth is higher than the long run
sustainable rate of growth.
• With higher economic
growth, people may start to
expect inflation – and this
expectation of rising prices can
become self-fulfilling.
Therefore, rapid economic
growth tends to cause upward
pressure on prices and wages –
leading to a
higher inflation rate.
INFLATIONARY GROWTH

• There is an increase in AD,

when the economy is close to
full capacity. We get an
increase in real GDP but also
an increase in the inflation
rate.
 LOW INFLATIONARY GROWTH

• It is possible to have economic

growth without rising inflation.
• it is possible to have economic
growth without causing inflation. If
growth is sustainable – if it is close to
the long trend run, then LRAS will
increase at the same rate as AD, and
therefore, we will not see inflation.
• Economic growth without
inflation. AD and LRAS
increasing at the same rate.
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