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How can you show that there is too little or not enough inflation in an economy with a Keynesian diagram?

Say, for example, that a government wanted to have a 3% inflation rate, but currently has only a 0.5% inflation rate. How would you illustrate the initial problem (the 0.5% inflation rate) in a Keynesian diagram?

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Hi,

What you're talking about is indeed difficult to visualise an AD/AS diagram shows given average price levels and not inflation rates. However, you can indicate that a 0.5% inflation rate is a concern to the government as it can easily lead to deflation (fall in the APL), and then show deflation in the diagram as opposed to the APL staying relatively the same (or only slightly increasing with stable inflation).

Is this clear?

Cheers,

EconDaddy
IB Economics teacher, examiner and tutor

www.econdaddy.com

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