Use the following to answer questions . Exhibit: Effects of Monetary Policy -(Exhibit: Effects of Monetary Policy) Suppose the economy is initially at Y₁ in Panel (a). It is experiencing A) an inflationary gap. B) a recessionary gap. C) an actual unemployment rate that is less than the natural unemployment rate. D) a situation that warrants a decrease in the money supply.

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The economy is currently operating below potential output (YS) and therefore experiencing a recessionary gap. This is indicated by the output gap between Y and YS in Panel (a).

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