Problem 2: Long-Run Equilibrium [15 Points] Suppose that an economy has a Potential Real GDP (Y*) of $200. This economy also has the following AEF at a p = 100: AE =200 + 0.5Y Note that for every $2 increase in p, C + NX decreases by $2, and so this AEF implies an AD of: AD:Y =600-2p AS is also given by: AS:Y =0.5p 5. What is Short-Run Equilibrium Real GDP (Y) and the Short-Run Equilibrium Price Level (p) in this economy? [1 point] 6. Is this economy in an inflationary gap, recessionary gap, or neither? How do you know? [1 point] Suppose now that the Government decided to not take action, and let the economy adjust naturally on its own through the medium-run. 7. What would we expect to happen to Real GDP (Y) and the price level (p) in the medium- run? Explain your answer using the AD-AS figure. [3 points] 8. What would be the price level in this economy after this medium-run adjustment? Here, you need to solve for this mathematically. [2 points] Suppose now that the Government does decide to intervene to close this output gap quickly, using Government Spending. 9. Does the Government need to increase or decrease Government Spending to achieve this goal? [1 point] 10. What would we expect to happen to Real GDP (Y) and the price level (p) in the medium- run with this intervention? Explain your answer using the AD-AS figure. [3 points] 11. What would be the price level in this economy after this medium-run adjustment where the government chooses to intervene? Here, you need to solve for this mathematically. [2 points] 12. How much does the Government need to change G by to achieve this closing of the output gap? [2 points]