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Coronavirus and Inflation: Pricing the Pandemic | Na...

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The AD–AS model explains price level and output through the relationship of aggregate demand (AD) and aggregate supply (AS). In a negative demand shock scenario, the AD line moves down and to the left. Assuming the supply curve remains constant, then output (i.e. real GDP5) will fall and costs and prices will fall. This is deflationary.

In a negative supply shock scenario, the AS line moves up and to the left. Assuming the demand curve remains constant, then output comes down and costs and prices go up. The result is inflation and potentially stagflation.

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