FIGURE 4 EXPANSIONARY FISCAL POLICY AT FULL EMPLOYMENT
When an economy is already at full employment, expansionary policies lead to no long-run improvement in real GDP. Beginning at full employment (point e), increasing aggregate demand moves the economy to output level Q1 above full employment (point a). This higher output is only temporary, however, as workers and suppliers adjust their expectations to the higher price level (P1), thus shifting short-run aggregate supply left toward SRAS2. But this just pushes prices up further, until finally workers adjust their inflationary expectations, and the economy settles into a new long-run equilibrium at point b, where the economy is again at full employment, but at a higher price level (P2).