(A) Using a Graph Showing Aggregate Demand, Short-Run Aggregate Supply

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The Answer is (b) The recessionary gap can be eliminated if aggregate demand shifts to the right.This can occur through government policy such as higher government expenditures or lower taxes or through recovery in some component of aggregate demand such as investment or net exports.If the gap is eliminated this way, real GDP returns to its full-employment level but the price level rises.The recessionary gap can also be eliminated if the short-run aggregate supply shifts to the right.This would occur as nominal wages and resource prices fall in response to the above natural rates of unemployment.As aggregate supply increases, real GDP returns to its full-employment level and the price level falls.However, this adjustment process can take a long time and the economy may be unwilling to bear the costs of high unemployment.It may be necessary for the government to stimulate aggregate demand to eliminate the gap.

(A) Using a Graph Showing Aggregate Demand, Short-Run Aggregate Supply

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