A similar sequence for closing a recessionary gap can
be illustrated in an aggregate supply - aggregate demand framework.
This figure shows how an expansion of the supply of money causes
a rightward shift of the aggregate demand curve from AD to AD prime.
Note that in the range of this shift, the aggregate supply curve is relatively flat.
This Keynesian range reflects the presence
of unemployed resources and ressionary forces.
In this region, we get a very small increase in the price level from the Feds
expansionary monetary policy and a large increase in real GDP as equilibrium
moves from P to P.
Suppose, however, that the Fed decides to expand the economy even further
and tries to push the aggregate demand out even more to say e double prime.
This is well past the economies level of potential output or potential GDP,
and in this case we are in the so-called classical range of the economy.
Here, the slope of the aggregate supply curve turns steeply upward.
In this fully employed economy, the higher money
stock would be chasing the same amount of output
so that the major impact of the Fed's expansionary
policy would be to significantly raise the price level.
With little increase in real GDP.