Wonderland’s economy is characterized by the following: Inflation has been mild (below 2%) for years. More recently, it is at 1.5%. The natural unemployment rate is estimated to be 5%. For the past 15 months, the unemployment rate has been ranging from 7 to 9% GDP growth rate has been in negative territory for the last three quarters.

Questions: How would you characterize the economy? Recessionary? Inflationary? Briefly explain why. With the help of AD-AS diagram, illustrate the recessionary or inflationary output gap. With the help of AE and 45 degree line (also called Income-expenditure equilibrium or Keynesian Cross), illustrate the recessionary or inflationary gap.