Keynesian Models of Inflation

Overview

The early models of Keynes thought, including the famous IS-LM model had no model of inflation built in. The prevailing thought was that if the economy is below full employment, then any increase of decrease in the GDP will produce no change in prices. When the economy reaches full utilization, then prices can rise indefinitely with any increase in demand.

Chart

The model can be visualized as the price level flat at points below full capacity uitilization, and then vertical (or nearly so) at full employment.