Final answer:
An AD/AS graph above full employment displays an economy where actual GDP exceeds potential GDP, with low cyclical unemployment and increased risk of inflation.
Step-by-step explanation:
When an economy is above full employment level, the AD/AS graph shows an equilibrium where actual GDP surpasses potential GDP. At this point, the economy experiences an inflationary gap where the level of output is on the right side of the vertical Long Run Aggregate Supply (LRAS) line, which represents potential GDP or full employment GDP. This situation is illustrative of an overheated economy with low cyclical unemployment but prone to inflationary pressures.
The equilibrium level of output, in this case, would be positioned to the right of the LRAS line on the Aggregate Demand (AD) curve. This implies demand for goods and services is high, which drives up prices and can result in increased inflation if the high demand persists. Over time, this may lead to higher wage demands as workers seek compensation for increased cost of living, contributing to an upward shift in the Aggregate Supply (AS) curve and potentially causing a decrease in output and an increase in prices.