1. Assume the economy of Eastland is currently operating above full employment. Assume the central bank and the government do not take any policy action to close the output gap. Explain how the economy automatically adjusts in the long run. Explain the cause of the adjustment.
2. Alternatively, suppose the government wants to close the gap using fiscal policy. Identify a fiscal policy action the government could implement to close the output gap.
3. In closing the output gap, will the automatic adjustment identified in the first question produce a higher, a lower, or the same price level compared to the fiscal policy identified in the second question?