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2013-05-14
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2013-5-14 11:57:30
If you insist that we should use AS AD model to illustrate the statement that inflation is the phenomenon of money, then please recall the long-run and vertical AS curve. Suppose there is an increase in money supply ( or the expansionary monetary policy ), then AD will shift rightward. You will find that such policy only results in the increase of the price level but not the boom of the GDP.

Of course, in the short-run in which AS is upward-sloping, The shift of AD will influence both the GDP and Price level. However, in the long-run, the self-adjustment mechanism of AS will push the economy return to the potential level of GDP and the total effects of the policy will only create the inflation.

That is why we say that inflation is the phenomenon of money.
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