Assume an open economy with a flexible exchange rate and a credible inflation target that is in an expansionary gap, with an inflation that is lower than the target level.

A. What could have caused this situation? ......

B. What type of policy can be used to stabilise the economy in this situation? How are the curves in the AD-AS model and Phillips model affected by this policy? Describe the effects on inflation, inflation expectations, output, and unemployment. .........

Briefly discuss why policy may or may not be preferable to self-correction in this specific situation. .........