AD Shift Right — Classical (At Full Employment)

What this diagram shows

This diagram demonstrates what happens in the classical model when aggregate demand increases while the economy is already operating at full employment capacity. The vertical Long-Run Aggregate Supply (LRAS) curve shows that real output cannot increase beyond the full employment level, regardless of demand changes. When AD shifts right, the economy moves to a new equilibrium with a higher price level but the same level of real GDP. This illustrates the classical view that demand-side policies are ineffective at increasing output in the long run and only create inflation.

Key points

• The LRAS curve is perfectly vertical at full employment level of output (Yfe), showing output cannot increase further
• Rightward shift in AD leads to movement from equilibrium point A to point B, with higher price level (P1 to P2)
• Real GDP remains unchanged at the full employment level despite increased aggregate demand
• The result is pure inflation - all the increase in nominal demand translates into higher prices
• This demonstrates the classical argument that fiscal/monetary stimulus is ineffective when the economy is at full capacity

Exam board notes

All major exam boards treat this diagram identically, though AQA tends to emphasize the policy implications more heavily in mark schemes. Some specifications may refer to this as the 'monetarist' rather than 'classical' view, but the analysis remains the same.