# Below, you are provided with the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves....

###### Question:

Below, you are provided with the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. You will use this information to identify if the economy is experiencing a recessionary gap or an expansionary gap. You will then determine whether expansionary or contractionary fiscal policy is more desirable. 135 Price Level LAS 130 SAS 125 120 115 110 1 105 AD 500 550 600 650 700 750 800 Real GDP (in billions) Part 1: Identify the value of Potential GDP in the economy depicted above. Part 2: Identify the value of Real GDP in the economy depicted above. Part 3: Based on your answers to Part 1 and Part 2, is the economy depicted above experiencing a recessionary or an expansionary gap?
Part 4: Based on your answer to Part 3, would contractionary or expansionary fiscal policy be more desirable? Part 5: If the government chooses to enact fiscal policy through a change in government purchases, should the government increase or reduce government purchases?

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