Q2. a. Draw the AD- AS diagram depicting an economy for which unemployment rate is lower than
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Q2.
a. Draw the AD- AS diagram depicting an economy for which unemployment rate is
lower than the natural rate. Is this economy facing an inflationary gap or
recessionary gap.
b. If the government does not intervene to close this gap, what would be the effect on
Real GDP and Price level in the long run? Show the effect on your diagram. [Hint: In
the Long run the economy self corrects itself]
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