Since this is a text-based AI, I can't actually draw on a graph. However, I can explain to you what the changes should look like on a standard aggregate demand and aggregate supply (AD-AS) model.
First off, keep in mind that:
1. A recessionary gap occurs when an economy's real GDP is lower than the potential GDP at full employment. This is depicted on the graph by the equilibrium point (intersection of AD and AS curves) being to the left of the Long Run Aggregate Supply (LRAS) line.
2. When the money supply increases:
i. The aggregate demand curve will shift to the right due to increased spending brought on by more disposable income in the economy.
ii. This will result in an increase in price levels and real GDP.
On the graph:
• The existing Aggregate Demand (AD) curve is AD1, and the Aggregate Supply (AS) curve is AS.
• The existing equilibrium – the point where AD1 and AS intersect – is to the left of the Long Run Aggregate Supply (LRAS), indicating a recessionary gap.
To depict an increase in the money supply:
• Draw a new AD curve to the right of AD1. Call this AD2. The shift to the right represents the increase in aggregate demand as a result of a larger money supply.
• The new equilibrium is where AD2 intersects with AS. If successful in closing the recessionary gap, this point should be on the LRAS, indicating full employment.
So, you would draw the new line (AD2) to the right of the existing AD1 line. The intersection of AD2 and AS should be on the LRAS line. This represents the new equilibrium brought on by the increased money supply and should symbolize full employment.
The state of the economy depicted at the right can be best described as having a recessionary gap.
draw a scenario depicting an increase in the money supply which brings the economy to full employment.
Which line and where should I draw the new line?
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Thank you
You're welcome! If you have any more questions, feel free to ask.
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