Contractionary Fiscal Policy Can Close an Inflationary Gap The economy is in short-run macroeconomic equilibrium at E1, where the aggregate demand curve, AD1, intersects the SRAS curve. But it is not in long-run macroeconomic equilibrium. At E1, there is an inflationary gap of Y1 Yp. 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.