Consider the aggregate demand (AD), short run aggregate supply (SAS) and long run aggregate supply (LAS) curves shown in the following diagram.

(a) Identify whether this economy is in an expansion or a contraction. Calculate the size of the recessionary or inflationary gap.(2 marks)

(b) Briefly explain how this economy might adjust back to long run equilibrium without the implementation of government policy. You do not need to draw a diagram, but you should briefly explain the adjustment process. Do you think the adjustment process you have described is realistic? Briefly explain your answer.(4 marks)

(c) Briefly explain how this economy might adjust back to long run equilibrium withthe help of monetary policy. You do not need to draw a diagram, but you should briefly explain the adjustment process. Is this monetary policy action likely to have a fast effect, or a slow effect on the economy? Briefly explain your answer.(4 marks)