The economy is in short-run macroeconomic equilibrium at point £, in the accompanying diagram. Based on the diagram, answer the following questions.

a. Is the economy facing an inflationary or a recessionary gap?

b. What policies can the government implement that might bring the economy back to long-run macroeconomic equilibrium? Illustrate with a diagram.

c. If the government did not intervene to close this gap, would the economy return to long-run macroeconomic equilibrium? Explain and illustrate with a diagram.

d. What are the advantages and disadvantages of the government implementing policies to close the gap? 14, In the accompanying diagram, the economy is in long-run macroeconomic equilibrium at point & when an oil shock shifts the short-run aggregate supply curve to SRAS). Based on the diagram, answer the following questions.

a. How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon known as?

b. What fiscal or monetary policies can the government use to address the effects of the supply shock? Use a diagram that shows the effect of policies chosen to address the change in real GDP. Use another diagram to show the effect of policies chosen to address the change in the aggregate price level.

c. Why do supply shocks present a dilemma for government policy makers?