So we are currently learning about the macroeconomic equilibrium in my first semester.

Our diagrams have the price level on the y-axis and real GDP on the x-axis.

We are talking about a country that has a target inflation of 2-5% experiencing an inflationary gap and it asks what the central bank would do to fix this including drawing diagrams.

So far I've talked about running contractionary MP through OMOs and talked about the chain effect of less reserves and higher interest etc leading to less consumption and investment and therefore less GDP.

Now the question I have -

As the final diagram with the aggregate demand shifting left, do I draw the equillibrium of the SRAS and aggregate demand just above the vertical potential GDP/LRAS because this country has a target inflation of 2-5%? Or do I draw it so the new AD, SRAS and LRAS all overlap are the market equillibrium?

So in the diagram I have provided, the LRAS, SRAS and AD all cross paths. Should the AD₁ curve be slightly to the right of the LRAS representing a 2-5% inflation?

\f