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, Y_P.

a. Is Brittania facing a recessionary or inflationary gap?

b. 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?

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

Transcribed Image Text:

Aggregate price level LRAS SRAS P, E1 AD1 Potential Y YĄ output Real GDP