Inflation Targets and

ADI / ASI Analysis

 ADI and ASI analysis

An inflation target
and the ADI curve
 AD plotted against inflation

Assume an inflation
.
. target of Ptarget
Rate of inflation (P)

.P
target

Aggregate demand
plotted against inflation

ADI
O Y1
National income
 ADI and ASI analysis

Equilibrium and the

effect of a rise in
aggregate demand
 AD and AS plotted against inflation
The rise in ADI ASI
causes a temporary
rise in national

. income and inflation

Rate of inflation (P)

.P b
.P 2

target
a c

ADI2

ADI1
O Y1 Y2 Y3
National income
 AD and AS plotted against inflation
With inflation at b being ASI
above the target, the
target rate of interest is
raised. Economy moves
.
Rate of inflation (P)

back to point a.

.P b
.P 2

target
a

ADI2

ADI1
O Y1 Y2
National income
 ADI and ASI analysis

Effect of an increase
in aggregate supply:
(a) a temporary increase
 The effects of a increase in aggregate supply
(a) a temporary increase in aggregate supply

ASI1
ASI2

.
Rate of inflation (P)

.P a
.P
target

2
b

ADI1
O Y1 Y2
National income
 ADI and ASI analysis

Effect of an increase
in aggregate supply:
(b) a permanent increase
 The effects of a increase in aggregate supply
(b) a permanent increase in aggregate supply

ASI1
ASI2
Central bank cuts
. target interest rate
Rate of inflation (P)

.P a c
.P
target

2
b

ADI2

ADI1
O Y1 Y2 Y3
National income
 ADI and ASI analysis

ADI curves based on

different Taylor rules
 ADI curves based on different Taylor rules

Curve ADI1: based on Taylor rule giving

relatively high weight to stable inflation

.
Rate of inflation (P)

.P
1
b

.P
target
a

ADI1

O Y1 Y0
National income
 ADI curves based on different Taylor rules

Curve ADI1: based on Taylor rule giving

relatively high weight to stable inflation
Curve ADI2: based on Taylor rule giving relatively
.
Rate of inflation (P)

high weight to stable real national income

.P
1
b c

.P
target
a

ADI1

ADI2

O Y1 Y2 Y0
National income