Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
If you do maths Inflation = ΔPrice/ΔTime
Δ = change
Expansionary fiscal policy and expansionary monetary policy cause an increase in AD. Deflationary versions of these two policies cause a fall.
Supply side policies influence aggregate supply (So does the availability of resources such as oil) .
An increase in AD or a fall in AS causes an increase in Price level, fall in AS causes a fall in real output, rise in AD causes a rise in real output. An increase in price level results in increased price obviously.This "results" in inflation. Inflation exists if price level increases. Deflation exists if price level falls which would be the result of a fall in AD or an increase in AS.
Just to note:
If price level increases by a larger gap than the last change in price level per given time period, inflation is increasing.
If price level increases by the same gap than the last change in price level per given time period, inflation is constant.
If price level increases by a smaller gap than the last change in price level per given time period, inflation is decreasing.
Here's a good evaluation for your exam if you're doing economics btw:
But ultimately that effect depends on where the positioning of the AD curve is relative to AS. If AD increases and it is on AS at full employment, prices will rise at the maximum rate. If AD is on AS at spare capacity and shifts left by a gap which does not result in it leaving spare capacity, price level will not change.
Last edited by JonathanM; 13-05-2012 at 01:30.