10.2.3—Growth and inflation

Rapid demand-led growth can raise inflation when output approaches capacity. Productivity-led growth can increase potential output with less price pressure, while a supply shock can create high prices and weak output together.

Use the AD/AS mechanism and the time horizon. Spare capacity, expectations, imported costs and the position of LRAS determine whether more spending changes real output, the price level or both.

A recovery from recession may raise GDP with little inflation; a boom at capacity may raise prices; a technology improvement can raise output while lowering unit costs.

Growth is not automatically inflationary, and low inflation is not proof that growth is sustainable or widely shared.