There is a model that tells you in simple terms what is going on...

  1. 5,236 Posts.
    lightbulb Created with Sketch. 35
    There is a model that tells you in simple terms what is going on and how inflation can be a possible outcome. It is called the IS-LM model.

    https://www.youtube.com/watch?v=XBkGZ1mA43E

    Once you have understood the model basics it becomes easy to realize that if the IS curve intercepts the LM curve at any point to the right of full employment, which is shown bellow by the vertical column, there will be inflation. That is, if the LM and IS curves move too much to the right (too much monetary and fiscal stimulus) then there will be inflation. However one has to take into account that there could be a liquidity trap, which if true would have flatten the LM curves opening the possibility of a different outcome.

    https://hotcopper.com.au/data/attachments/3264/3264834-8b6180cf863fa7da19dbf0f266b18c02.jpg







 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.