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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

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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