The economy is in short-run macroeconomic equilibrium at point E₁in 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?

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LRAS Aggregate price level SRAS1 E1 P1 AD1 Y1 YP Real GDP