Question 16.20

13. The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.

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  1. Is the economy facing an inflationary or a recessionary gap?

  2. What policies can the government implement that might bring the economy back to long-run macroeconomic equilibrium? Illustrate with a diagram.

  3. If the government did not intervene to close this gap, would the economy return to long-run macroeconomic equilibrium? Explain and illustrate with a diagram.

  4. What are the advantages and disadvantages of the government implementing policies to close the gap?