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?
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.
Thank you
You're welcome! If you have any more questions, feel free to ask.
To depict an increase in the money supply bringing the economy to full employment, you can make the following changes on the graph:
1. Draw an upward shift of the aggregate demand (AD) curve: This represents the increase in the money supply. The new AD curve should intersect the aggregate supply (AS) curve at the full employment level of output (i.e., where potential GDP equals actual GDP).
2. Label the new AD curve as AD2 to differentiate it from the initial AD curve.
In this scenario, the new AD curve would be to the right of the initial AD curve, showing that an increase in the money supply has stimulated aggregate demand, leading to higher output and employment, ultimately closing the recessionary gap.
To understand how an increase in the money supply can bring the economy to full employment, it is important to visualize the scenario graphically.
In this context, the "recessionary gap" refers to a situation where the level of real GDP (gross domestic product) is below the potential GDP or full employment level. This gap represents the underutilization of resources and a slowdown in economic activity.
To depict an increase in the money supply, you will need to refer to the money market graph, which shows the relationship between the interest rate and the quantity of money. In this graph, the vertical axis represents the interest rate, and the horizontal axis represents the quantity of money.
Typically, when the money supply increases, it leads to a decrease in interest rates. Lower interest rates encourage borrowing and investment, which helps stimulate economic activity and restore equilibrium in the economy.
To represent the increase in the money supply and the subsequent decrease in interest rates, you will need to draw a new vertical line representing the new quantity of money. This new line should be shifted to the right of the original line, indicating an increase in the money supply.
Once the new line is drawn, the intersection of this line with the aggregate demand curve will indicate the new level of GDP at full employment. This new intersection represents the equilibrium point where the full utilization of resources in the economy is achieved.
Remember, this scenario assumes other factors remain constant, and it is important to consider the broader context and other economic variables when analyzing real-world situations.