fiscal policy correction that will bring the economy to full employment. Currently, the LRAS is on the right of the SRAS on the AD line. Which line and where should I draw new line
In order to bring the economy to full employment, the government can implement expansionary fiscal policy. This would involve increasing government spending and/or reducing taxes, which would lead to an increase in aggregate demand (AD).
To reflect this policy change, you should draw a new AD line to the right of the current AD line. This new line should intersect both the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves at the level of full employment.
By implementing expansionary fiscal policy, the new AD line would shift to the right, resulting in an increase in output and employment in the short run. Over time, as the economy adjusts, the SRAS curve may shift to meet the new AD line. However, the LRAS curve remains unaffected as it represents the economy's potential output at full employment. Therefore, the new AD line should intersect the LRAS curve at the same level as the previous AD line.
To bring the economy to full employment, you need to correct the fiscal policy by shifting the aggregate demand (AD) line to the right. This shift in AD will help close the gap between the long-run aggregate supply (LRAS) and short-run aggregate supply (SRAS) lines.
To determine the new AD line, you will need to increase government spending and/or decrease taxes. This will lead to an increase in aggregate demand and stimulate economic activity, thereby increasing production and employment levels.
Here are the steps to draw the new AD line:
1. Identify the current position of the LRAS, SRAS, and AD lines on a graph.
2. Determine the amount of shift required to move the AD line to the right. This shift should be enough to reach the point where the LRAS intersects the SRAS (full employment).
3. Draw a new AD line parallel to the old AD line, but to the right of it. The distance the line is shifted depends on the amount of fiscal stimulus needed to reach full employment.
4. The intersection of the new AD line with the LRAS and SRAS lines represents the new equilibrium point at full employment.
It is important to note that the exact position and slope of the new AD line will depend on various factors, including the magnitude of the fiscal policy measures, the responsiveness of the economy to changes in aggregate demand, and other external factors influencing the economy.