Equilibrium GDP and Prices – Stagflation

Declines in aggregate supply bring about stagflation—high unemployment and increased inflation.

Increases in aggregate supply conversely give rise to high economic growth and low inflation.

Higher costs for labor, raw materials, and energy lead to a decrease in AS, resulting in lower economic growth and higher prices.

Higher rates of productivity growth shift the AS to the right, resulting in higher output and lower unit input prices.

From an investment perspective, a decline in AS (leftward shift of the SRAS curve) suggests

reducing investment in fixed income;

reducing investment in most equity securities;

increasing investment in commodities or commodity-based companies.