The diagram 11.3  presents the country’s transformation curve.

• In an ideal situation, the economy is located at some point on the transformation curve (point B).

• In a deflationary situation, the economy is located at some point below the transformation curve (point A).

• In an inflationary situation, the economy is ostensibly located at some point above the transformation curve (point C), which is of course not possible in reality.

Under this scenario, point C represents a situation where aggregate demand is greater than GDP (YF).

In this situation, the prices will begin to rise and will only stop rising when demand equals the quantities that the economy can produce, i.e. the economy will stabilize at some point on the transformation curve.Diagram 11.13

The national transformation curve

Diagram 11.13

The national transformation curve