1.14. The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on...
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1.14. The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.
a. Is the economy facing an inflationary or a recessionary gap?
b. What policies can the government implement that might bring the economy back to long-run macroeconomic equilibrium?
Illustrate with a diagram.
c. 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.
d. What are the advantages and disadvantages of the government implementing policies to close the gap?
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