Using the Expenditure Model (GDP = C + G + I + NX), draw a graph that depicts Demand-Pull inflation.

To create a graph that depicts Demand-Pull Inflation using the Expenditure Model (GDP = C + G + I + NX), we will describe the steps to construct the graph and explain the concept. Here are the steps:

1. ### Break Down the Problem

• Identify the components of GDP: Understand what each component represents:

  • C: Consumption
  • G: Government Spending
  • I: Investment
  • NX: Net Exports (Exports - Imports)

• Define Demand-Pull Inflation: Demand-Pull Inflation occurs when the aggregate demand in an economy outpaces aggregate supply, leading to an increase in prices.

2. ### Relevant Concepts

• Aggregate Demand (AD): The total demand for all goods and services in the economy at different price levels.
• Aggregate Supply (AS): The total supply of goods and services that firms in an economy plan to sell at a given overall price level.

3. ### Analysis and Detail

• Graphing: To graph Demand-Pull Inflation, we need:

  • A vertical axis representing the Price Level.
  • A horizontal axis representing Real GDP (Output).

• Curve Placement:

  • Plot an upward-sloping Aggregate Supply (AS) curve.
  • Plot a downward-sloping Aggregate Demand (AD) curve.

• Shifting Curves:

  • Initially, the economy is at equilibrium where AD1 intersects AS at a price level P1.
  • As aggregate demand increases, shift the AD curve to the right (AD2).
  • The new intersection with AS at a higher price level P2 indicates inflation.

4. ### Verify and Summarize

Ensure the graph accurately represents the initial and new equilibrium points, showing the shift in the AD curve due to increased demand leading to higher prices.

Final Answer

The graph depicting Demand-Pull Inflation will show:

• The initial equilibrium at (P1, GDP1) where AD1 intersects AS.
• The new equilibrium at (P2, GDP2) where the new AD2 intersects AS, indicating higher prices due to increased demand.

In conclusion, Demand-Pull Inflation is visually represented by the rightward shift of the Aggregate Demand curve leading to a new equilibrium at a higher price level on the graph.