FIGURE 29-3 Refer to Figure 29-3.Suppose the economy is at E₁ and there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at E₁,the economy will tend towards a new long-run equilibrium characterized by a(n)

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In the absence of policy response, the economy will tend towards a new long-run equilibrium where both the price level and real GDP will decrease. This is because the economy is operating below its potential level, which means there is excess supply in the market leading to lower prices and lower GDP. Therefore, the correct choice is D- lower price level and GDP at the potential level.