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

(a) Does this economy have a recessionary gap or an inflationary gap? What values (high or low) would you expect for GDP, unemployment and inflation? Briefly explain your answer.(5marks)

(b) Identify an appropriate fiscal policy response that might be implemented, and explain how it might work.(3marks)

(c) State the impact your policy response in Question (b) would have on the budget balance.(2marks)

P ($) LAS 130 120 SAS 110 100 90 80 AD 11 400 500 600 700 800 900 GDP ($)