Final answer:
A full-employment economy's equilibrium is depicted in an aggregate supply and aggregate demand diagram, with the equilibrium price level (P) and output (Y) at the intersection of the curves. Shifting the aggregate demand right increases equilibrium output, while shifting it left decreases equilibrium output. Careful adjustments to aggregate demand can manage growth and control inflation at full employment.
Step-by-step explanation:
In an economy operating at full employment, we can represent the equilibrium using an aggregate supply and aggregate demand diagram. The upward-sloping aggregate supply curve (AS) becomes nearly vertical at full employment, indicating that an increase in the price level does not lead to a significant increase in output as all resources are fully utilized. The downward-sloping aggregate demand curve (AD) represents the relationship between the price level and the quantity of output demanded.
At the intersection of the AS and AD curves, we find the equilibrium price level (labeled as P) and the equilibrium output level (labeled as Y), also known as the real GDP. This point represents the economy's potential or full-employment GDP.
When the aggregate demand shifts right, this typically indicates an increase in consumer spending, investment, government spending, or net exports, leading to a higher equilibrium output (real GDP) and potentially higher price level. Conversely, when the aggregate demand shifts left, we observe a decrease in these components, leading to a lower equilibrium output.
In this scenario, using aggregate demand to alter the level of output could be considered to manage economic growth and unemployment. However, if the economy is already at full employment, increasing aggregate demand may lead more towards inflationary pressure rather than increasing output. Therefore, one might suggest careful use of fiscal or monetary policy to control any inflationary increases in the price level rather than to alter the level of output significantly.