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This diagram illustrates how expansionary fiscal or monetary policy shifts aggregate demand (AD) rightward, increasing real GDP and the price level.
AD1: Initial aggregate demand before expansionary policy.
AD2: Aggregate demand after expansionary fiscal or monetary policy.
SRAS: Short-run aggregate supply curve, assumed unchanged.
LRAS: Long-run aggregate supply, vertical at full employment output.
PL1: Initial price level before policy intervention.
PL2: New, higher price level after AD increases.
Y1: Full employment level of output achieved through policy intervention.
Expansionary policy is used to close a deflationary or recessionary gap by increasing aggregate demand (AD).
Initially, the economy is in equilibrium at AD1, SRAS, and price level PL1, with output at full employment (Ye).
A shift to AD2 represents the effect of expansionary fiscal policy (increased government spending or tax cuts) or monetary policy (lower interest rates, increased money supply).
This leads to a new equilibrium with higher output at full employment (Y2) and a higher price level (PL2).
The diagram demonstrates the short-run effects of policy tools on output and inflation.
Explore other diagrams from the same unit to deepen your understanding
A diagram illustrating the fluctuations in real GDP over time, including periods of boom, recession, peak, and trough, relative to the long-term trend of economic growth.
This diagram shows the intersection of the aggregate demand (AD) and short-run aggregate supply (AS) curves to determine the equilibrium price level and real GDP.
A diagram showing the Classical model of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS), used to explain long-run macroeconomic equilibrium.
A Keynesian aggregate demand and long-run aggregate supply (AD–LRAS) diagram showing how real GDP and the price level interact across different phases of the economy, including spare capacity and full employment.
A diagram showing an output (deflationary) gap, where the economy is producing below its full employment level of output (Ye).
A macroeconomic PPC diagram illustrating the trade-off between producing consumer goods and capital goods, highlighting opportunity cost and future growth implications.
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