14. The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.

Real GDP Aggregate price level Y1 YP LRAS SRAS1 AD1 E1 P1

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?