There is an intermediate range, characterized in terms of a trade-off between employment and inflation. Within this range, the price level is partially flexible. The actual rate of unemployment will be greater than or equal to the natural rate of unemployment. The Classical Range , where the economy is operating a full capacity, the amount of unused economic resources is very scarce, and the price level is perfectly flexible. The price level has the potential to increase very rapidly because the real level of GDP cannot be increased to fulfill excess demands.
Producers are unable to respond to increases in demand for final goods.
Caused by rising factor prices which in turn raise per unit production costs. Some inflation is desirable because a relatively high real GDP accompanied with a moderately high price level will result in full employment. Some inflation is necessary to eliminate cyclical unemployment and achieve peak economic performance, where production is presumed to be totally efficient. Inflation becomes a concern when it becomes excessive, as aggregate expenditures far exceed the economy s capacity to produce. The ideal economic system is capitalism.