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How can I show a relationship between Output and Inflation? which graph AD/AS or IS/LM or?,...

How can I show a relationship between Output and Inflation? which graph AD/AS or IS/LM or?, ( College level answer please) detailed explanation would be welcomed

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Answer #1

AD AS diagram must be used to show the relationship between output and inflation. The xaxis shows real gdp and y axis shows price level. AD is downward sloping while AS is upward sloping.

Now if, there is an increase in aggregate demand due a monetary or fiscal policy change, the AD will shift rightwards to AD2. The new equilibrium is at E2 where there is increased output and price level. Hence there is a positive relationship between inflation and output.

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