Question 17.13

2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP.

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  1. Is Brittania facing a recessionary or inflationary gap?

  2. Which type of fiscal policy—expansionary or contractionary—would move the economy of Brittania to potential output, YP? What are some examples of such policies?

  3. Illustrate the macroeconomic situation in Brittania with a diagram after the successful fiscal policy has been implemented.