Final answer:
To draw a graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves at full employment, you should draw the vertical LRAS at the level of potential GDP, with the upward-sloping SRAS and downward-sloping AD curves intersecting at the current price level and full-employment output.
Step-by-step explanation:
The student's question seeks to understand how to draw a graph that shows the long-run aggregate supply (LRAS), short-run aggregate supply (SRAS), and aggregate demand (AD) curves when the economy is at full employment. At full employment, the LRAS is represented by a vertical line, indicating that real output cannot increase beyond this point. The SRAS typically slopes upwards, and the AD curve slopes downwards.
To correctly label the graph:
- Draw a vertical axis to represent the price level and a horizontal axis to represent real GDP (Y).
- Label the current price level as PL1 on the vertical axis.
- Draw the LRAS curve as a vertical line at the full employment level of output, Y, and label this point as Y.
- Draw the SRAS curve sloping upwards to the right of the LRAS.
- Draw the AD curve sloping downwards to the right intersecting the SRAS curve at PL1 and Y indicating the equilibrium price level and output at full employment.
This diagram reflects how the economy is operating at its potential GDP or full-employment GDP, with machines and factories running at capacity and the unemployment rate at the natural rate of unemployment.