PLf
PLc
Down
Yc
Yf
Down
RGDP = Y
PL
PLf
PLc
up
Yc
Yf
up
RGDP = Y
PL
Closing a Recessionary Gap with Aggregate Demand
The graph above shows an economy in a recessionary gap.
Show what happens to aggregate demand (AD1) on
the graph above if any of the components of AD below change:
Increase in Consumption (C)
Increase in Investment (I)
Increase in Government Spending (G)
Increase in Exports (X)
Decrease in Imports (M)
Notice as you shift the AD to the right, then the recessionary gap
closes and gets to or closer to full employment (Yf).
The graph above shows an economy in an inflationary gap.
Show what happens to aggregate demand (AD1) on
the graph above if any of the components of AD below change:
Decrease in Consumption (C)
Decrease in Investment (I)
Decrease in Government Spending (G)
Decrease in Exports (X)
Increase in Imports (M)
Notice as you shift the AD to the left, then the inflationary gap
closes and gets to or closer to full employment (Yf).
Closing an Inflationary Gap with Aggregate Demand