mps1
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I am having trouble understanding the difference between shifts in the AD curve and movements along the AD curve. I know that movements along the curve are said to be caused by changes in the 'price level', but find it difficult to reconcile this with my knowledge about inflation. When discussing the effects of low and stable inflation, my teacher said that we can show its benefits by drawing an outward shift in the AD curve. Is it possible that inflation (which is of course about changes in the price level) could cause an outwards shift in AD due to the of the following effects:
-changes in inflation expectations for the future
-ability of firms and consumers to plan for the future

Thanks for any help
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hannah00
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In the short term we assume prices are fixed.

That is why if Govt spending increases. This causes a shift in the AD Curve.

For the Goods market market and Money Markets to be in equip we need a new combination of Price and Y


Changes in inflation can cause a shift in AD. From the fisher equation real interest rates = nominal rates - inflation expectations

A increase in inflation expectations reduces real interest rates.

Lower real interest rates make it more attractive for buisnesses to investment, investment is a component of AD
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ashaxo99
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shifts of AD [which is C + I + G - (X-M)] can occur due to changes in any of its determinants - C, I, G, X and M.
Demand-pull inflation occurs when any of these determinants cause an increase in AD, which increases price level. if anticipated inflation is present in the economy, then this could impact determinants of AD such as investment and consumption (business expectations/previous consumer spending are a determinant of investment, and likewise future inflation could impact consumers' real wages/incomes which are a determinant of consumption, etc.)

A movement along AD occurs when there are shifts in SRAS, which could cause an increase/decrease in price-level.
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mps1
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(Original post by hannah00)
In the short term we assume prices are fixed.

That is why if Govt spending increases. This causes a shift in the AD Curve.

For the Goods market market and Money Markets to be in equip we need a new combination of Price and Y


Changes in inflation can cause a shift in AD. From the fisher equation real interest rates = nominal rates - inflation expectations

A increase in inflation expectations reduces real interest rates.

Lower real interest rates make it more attractive for buisnesses to investment, investment is a component of AD
Are there any other ways that inflation can cause a shift in AD, other than expectations of higher/lower inflation? If an economy has low and stable inflation and as a result firms and consumers are better able to plan (there is less uncertainty over future prices and costs) could this lead to an outwards shift too?
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hannah00
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(Original post by mps1)
Are there any other ways that inflation can cause a shift in AD, other than expectations of higher/lower inflation? If an economy has low and stable inflation and as a result firms and consumers are better able to plan (there is less uncertainty over future prices and costs) could this lead to an outwards shift too?
Possibly if we assume low stable inflation increases buisness confidence

This would increase the autumous component of investment that doesnt depend on intrest rates
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mps1
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(Original post by hannah00)
Possibly if we assume low stable inflation increases buisness confidence

This would increase the autumous component of investment that doesnt depend on intrest rates
Ok thanks a lot
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TeeEff
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(Original post by mps1)
I am having trouble understanding the difference between shifts in the AD curve and movements along the AD curve. I know that movements along the curve are said to be caused by changes in the 'price level', but find it difficult to reconcile this with my knowledge about inflation. When discussing the effects of low and stable inflation, my teacher said that we can show its benefits by drawing an outward shift in the AD curve. Is it possible that inflation (which is of course about changes in the price level) could cause an outwards shift in AD due to the of the following effects:
-changes in inflation expectations for the future
-ability of firms and consumers to plan for the future

Thanks for any help
In terms of the difference, remember that a movement implies that the underlying basis of the AD curve remains the same, whereas a shift implies that something has fundamentally changed. Using this framework is probably the easiest way to understand it.

hannah's already looked at the effect of expectations on firms' investment. You can also apply the same principles to consumer spending, where consumers decide to spend more now because they expect inflation to significantly increase for example, and are thus eager to retain as much purchasing power as possible. Notice here how this is done BEFORE the inflation level has actually changed. Ergo, at the same given price level, you now have a fundamental change in how some of the AD components act. There is hence a shift in AD.
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