Final answer:
Equilibrium output occurs where aggregate expenditure equals output on the Keynesian cross diagram. A rightward shift in aggregate demand increases equilibrium output, while a leftward shift decreases it. Policy recommendations depend on whether the economic goal is to alter output or control inflation.
Step-by-step explanation:
The question pertains to the concept of macroeconomic equilibrium, specifically within the Keynesian economic framework. In the context of a Keynesian cross diagram, equilibrium output (E) is where aggregate expenditure is equal to output. This occurs at the point where the aggregate expenditure line intersects the 45-degree line, which represents all points where national income equals aggregate expenditure.
When the aggregate demand shifts right, it represents an increase in total spending, leading to a higher level of equilibrium output as the economy moves up the aggregate supply curve. Conversely, if the aggregate demand shifts left, it indicates a decrease in total spending, resulting in a lower equilibrium output as the economy moves down the aggregate supply curve.
In terms of policy, using aggregate demand to alter output levels can be effective in managing short-term economic fluctuations. However, to tackle inflationary pressures, both monetary and fiscal policies may be considered to control inflation without necessarily reducing output below its potential level.