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Figure: Policy Alternatives
-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. Suppose that the initial equilibrium is at real GDP level Y₁ and price level P₂ in panel (a) . At real GDP level Y₁ there is:

Question

Use the following to answer questions:
Figure: Policy Alternatives

-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. Suppose that the initial equilibrium is at real GDP level Y₁ and price level P₂ in panel (a) . At real GDP level Y₁ there is:

Quizplus · Accepted Answer

The initial equilibrium is located below the potential output curve (PPC), indicating a recessionary gap. This means that the economy is underutilizing its resources and is producing less than its potential. Therefore, the best choice is B.

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