INFLATION SHOCKS: 0 Events that produce temporary sudden changes in inflation rate. Oil price hikes of the 1970s. inflation shocks produce a temporary shift in the SRIA curve, Combining ADI and SRIA curves: SRIA curve = summarises the impact of cyclical unemployment and output gap on inflation for a given inflation expectation ADI summarises short run impact of inflation on real interest rate, AE and equilibrium output Putting the two together enables us to understand the factors that determine both output and inflation in the short run. Why inflation begets inflation: Inflation Here the economy is overheating It is operating above the potential level (el) This means a tight labour market and inflation and interest rates rise Workers negotiate how much they will be paid for the next period (adaptive expectations) when they do so they will factor in the higher inflation rate and this shifte up the SRIA curve