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Should I use 'inflation rate' instead of 'price level' when using an AD/AS diagram?

Using price level implies that an AD shift to the left causes deflation, which isn't necessarily true, unless the economy is in a deep recession. An AD decrease results in disinflation, but not a reduction in the price level, so why do most AD/AS diagrams still use price level on the vertical axis instead of the inflation rate?

(edited 2 years ago)

Reply 1

cloudy1012

It's to show your analysis skills, so if price changes, what happens to the inflation rate. It's how they've always been drawn

Reply 2

bluesun86

Original post by cloudy1012

It's to show your analysis skills, so if price changes, what happens to the inflation rate. It's how they've always been drawn

So I draw 2 separate diagrams, one with the inflation rate and one with the price level?

Reply 3

BenRyan99

Careers Forum Helper

Original post by bluesun86

I don't really get your question tbh. AD/AS diagrams are too basic to infer whether an AD leftward shift causes deflation or disinflation and normally you just specify the axis as an infinite continuum rather than a line between two finite numbers.

Ultimately, a leftward AD shift causes a decrease in the price level, whether that causes deflation or disinflation doesn't affect what should be on the y-axis. It only infers disinflation if you actively label the origin as zero on every graph which most don't do and you're not expected to. Without labelling the origin the a leftward AD shift can plausibly result in deflation. Either way it's not important, just put price level.