Question

Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?

Short answer

The $\mathrm{K}$view of the AD/AS Model uses the curve of SRAS, which is nearly horizontal at levels of output below potential GDP and vertical at potential GDP output level. Thus, when there is beginning made from potential output, any decrease in $\mathrm{AD}$(from ${\mathrm{AD}}_0$to ${\mathrm{AD}}_1$) affects only output (as output decreases from $Y_0$to $Y_1$), but prices are not affected.

Similarly, the prices and not the output is affected by any increase in $AD$.

Due to increase in Exports demand, $AD$increases, and this might cause an inflationary gap in the economy, where demand puts effort to push the economy past the potential output.

Step-by-step solution

Given information

Suppose the economy is operating at potential GDP when it experiences an increase in export demand.

Explanation

The considerable logical answers to the delivered condition would be as written below:

$1.$Make the factories operate overtime to construct export goods.

$2.$Outsource production to low-cost economies and then

sell the goods to the country which has created the export demand.

Keynes's (K) opinion 

According to Keynes's (K) opinion, full employment is a condition where there will be no additional growth in output when the worth of the effective demand increases.

It is known that when there is an upsurge in export demand, it means Aggregate Demand (AD) is growing since net exports are a segment of Aggregate Demand.

At and above full employment, the costs instead of the output increase if there is an increase in AD and employment. Therefore, the full work employment level corresponds to potential output. Consider the below diagram:

Graphical Explanation 

The K view of the AD/AS Model uses the curve of SRAS, which is nearly horizontal at levels of output below potential GDP and vertical at potential GDP output level. Thus, when there is beginning made from potential output, any decrease in $\mathrm{AD}$(from ${\mathrm{AD}}_0$to ${\mathrm{AD}}_1$) affects only output (as output decreases from $Y_0$to $Y_1$), but prices are not affected. Similarly, the prices and not the output is affected by any increase in $AD$.

Due to an upsurge in Exports demand, AD increases, and this might generate an inflationary gap in the economy, where need puts action to push the economy past the potential output.

For example, employees function overtime to increase output. Thus, the economy, in turn, undergoes inflation. The key policy proposal is that government should step in and fill the gap, reducing spending during booms so that the AD returns to compare the potential output.

Final answer

The K view of the AD/AS Model uses the curve of SRAS, which is nearly horizontal at levels of output below potential GDP and vertical at potential GDP output level. Thus, when there is beginning made from potential output, any decrease in $AD$(from $A{D}_0$to $A{D}_1$) affects only output (as output decreases from $Y_0$to $Y_1$), but prices are not affected.

Similarly, the prices and not the output is affected by any increase in AD.

Due to increase in Exports demand, $AD$increases, and this might cause an inflationary gap in the economy, where demand puts effort to push the economy past the potential output.