The economy is in short-run macroeconomic equilibrium at E₁, where the aggregate demand curve, AD₁, intersects the curve. But it is not in long-run macroeconomic equilibrium. At E₁, there is an inflationary gap of Y₁ − Y_P. A contractionary fiscal policy—such as reduced government purchases of goods and services, an increase in taxes, or a reduction in government transfers—shifts the aggregate demand curve leftward. It closes the inflationary gap by shifting AD₁ to AD₂, moving the economy to a new short-run macroeconomic equilibrium, E₂, which is also a long-run macroeconomic equilibrium.