. The sources of inflation and stagflation

Consider a hypothetical country in which labor is the primary cost incurred by firms. A new government is voted into power and decides that all workers must have their wages doubled. Firms respond by laying off thousands of workers and charging much higher prices.

The following diagram shows the aggregate demand (AD) and aggregate supply (AS) curves for this country before the inflationary period.

Shift one of the curves to illustrate the primary cause of the inflation described in the preceding paragraph.

Note: Select one of the curves and drag it to the desired position. The curve will snap into position, so if you try to move the curve and it snaps back to its original position, just drag it a little farther.

? O AD AS AS AD REAL GDP