Outcomes: Increase in economic growth and demand-pull inflationary pressure
With LRAS Included:
Initial Equilibrium: Y1, P1
Deflationary Gap/Recessionary Gap/Negative Output Gap
AD Shift to the Right: From AD1 to AD2
Outcomes: Increase in economic growth, demand-pull inflationary pressure, moving towards full employment (YFE)
Keynesian Model
Only One Way to Show AD Shift
Initial Equilibrium at the Bend of LRAS (The Sweet Spot)
AD Shift to the Right: From AD1 to AD2
Outcomes: Increase in economic growth (Y1 to Y2), increase in demand-pull inflationary pressure (P1 to P2)
Evaluation: If AD is on the horizontal part, no inflationary pressure; if on the vertical part, no increase in growth, only inflationary pressure
Shifting Short-Run Supply (SRS)
Classical Model Phenomenon
Initial Equilibrium: Y1, P1
Positive Supply-Side Shock: Shift SRS to the right (SRS1 to SRS2)
Outcomes: Increase in economic growth, reduction in cost-push inflationary pressure
Negative Supply-Side Shock: Shift SRS to the left (SRS1 to SRS3)
Outcomes: Decrease in economic growth, increase in cost-push inflationary pressure (Stagflation)
Shifting Long-Run Aggregate Supply (LRAS)
Classical Model
Initial Equilibrium: YFE, Price Level
LRAS Shift to the Right: From LRAS1 to LRAS2
Outcomes: Increase in actual and potential growth, reduction in cost-push inflationary pressure
Keynesian Model
Initial Equilibrium: AD cuts LRAS at the Bend (Sweet Spot)
LRAS Shift to the Right: From LRAS1 to LRAS2
Outcomes: Four different GDP levels on x-axis, Increase in potential growth (YFE1 to YFE2), increase in actual growth (Y1 to Y2), reduction in cost-push inflationary pressure (P1 to P2)
Conclusion
Both Classical and Keynesian models are valid
Accuracy of drawing is critical to score full marks