To determine the fiscal policy correction that would bring the economy to full employment GDP, we need to understand the context of the situation and the relationships between the different lines in the aggregate demand (AD) and aggregate supply (AS) model.
In the AD-AS model, the AD line represents the aggregate demand in the economy, the SRAS line represents the short-run aggregate supply, and the LRAS line represents the long-run aggregate supply. When the LRAS is to the left of the SRAS on the AD line, it indicates an economic recession or a situation where the economy is operating below its full employment level of output.
To bring the economy to full employment GDP, we need to shift the AD line to the right. This can be achieved through expansionary fiscal policy, which involves increasing government spending or decreasing taxes. By doing so, it stimulates consumer and government spending, leading to an increase in aggregate demand.
To draw the new line, follow these steps:
1. Determine the amount of the fiscal policy correction needed to reach full employment GDP.
2. Once you have the necessary amount, shift the AD line to the right by that magnitude.
3. Start from the original AD line and use a ruler or a straight edge to draw a new line that is parallel to and to the right of the original line. The distance between the original AD line and the new line should be the same as the magnitude of the fiscal policy correction you calculated.
Properly label this new line as "AD^1" or "AD Prime" to indicate that it represents the new aggregate demand curve after the fiscal policy correction.
Please note that this explanation assumes a simplified version of the AD-AS model, and in reality, the relationships and interactions between various factors in the economy can be more complex.