To bring the economy to full employment GDP, you would need to shift the Aggregate Demand (AD) line to the right so that it intersects with the Long-Run Aggregate Supply (LRAS) line. This would indicate that there is no output gap and the economy is operating at its potential level of production.
You should draw the new AD line to the right of its current position, aligning it with the LRAS line. This shift can be achieved through expansionary fiscal policy, which involves increasing government spending (such as on infrastructure projects or job-creation programs) or reducing taxes. These measures aim to stimulate consumer spending and enable businesses to invest more, thereby increasing aggregate demand in the economy.
fiscal policy correction that would bring the economy to full employment GDP. Properly label this line. Currently, the LRAS is to the left of the SRAS on the AD line. Which line and where should I draw the new line?
3 answers
no, the correct answer is the new AD line needed to be draw to the left of the AD line and the new AD line need to be intercept at the same point where the LRAS and SRAS intercept at.
I apologize for the confusion. Based on your correction, the new AD line should indeed be drawn to the left of the current AD line. It should intersect with the LRAS line and the Short-Run Aggregate Supply (SRAS) line at the same point where they intersect. This scenario suggests that the economy needs a contractionary fiscal policy to reduce aggregate demand and bring it in line with the potential output of the economy. Measures like reducing government spending or increasing taxes can be employed to achieve this goal. By shifting the AD line to the left, the economy can reach full employment GDP.