Long description

This diagram has Aggregate Demand (AD) on the vertical axis and Income (Y) on the horizontal axis.

A solid line at a 45 degree angle is drawn upwards from the origin.

From a short way up the vertical axis, a straight line aggregate demand schedule is drawn, sloping upwards. This is labelled as C+I+G zero. This has a shallower slope than the 45 degree line and intersects the 45 degree line quite low down. A dashed line is drawn from this intersection point vertically down to the £200m point on horizontal Income axis.

From about half way up the vertical axis, a second aggregate demand schedule is drawn. This is parallel to the first one. This is labelled as C+I+G1. This intersects the 45 degree line much further along the line. A dashed line is drawn from this intersection point down to the horizontal Income axis. This point is much further along the axis than the point from the first aggregate demand schedule.

The diagram shows three rounds of the fiscal stimulus process, via a series of vertical and horizontal arrows that form three steps. The arrows decrease in length as we move from left to right.

The first vertical arrow runs from the point of intersection between the lower aggregate demand schedule and the 45 degree line directly up to the higher aggregate demand schedule. This has ‘£300m’ written beside it. . Above the point where the arrow hits the higher aggregate demand schedule is written ‘Round 1’.

From the point where the vertical arrow hits the higher aggregate demand schedule, an arrow runs horizontally right to hit the 45 degree line. This arrow has ‘£300m’ written beside it. Another arrow runs vertically up from this point on the 45 degree line up to the higher aggregate demand schedule, with ‘£150m’ written beside it. Above this point is written ‘Round 2’.

From this point on the higher aggregate demand schedule an arrow runs horizontally right to the 45 degree line, and then vertically up to the higher aggregate demand schedule. This has ‘£75m’ written beside it and above is written ‘Round 3’. A final short arrow is drawn horizontally to the 45 degree line. This is just short of the equilibrium position, where the higher aggregate demand schedule intersects the 45 degree line.

There is one further line on the diagram. From the point where the first vertical arrow hits the higher aggregate demand schedule, a dashed line is taken horizontally left to the vertical axis, to a point labelled ‘£500m’