Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Refer to Figure: Inflationary and Recessionary Gaps. If the economy is in short-run equilibrium at Y₁ in panel (b), to return to potential output at Y_P policy makers should use: A) contractionary stabilization policy. B) expansionary stabilization policy. C) policies to shift the SRAS to the left. D) policies to shift the LRAS to the left.

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To return to potential output, the economy needs to move from Y₁ to Y_P, which means shifting from an inflationary gap to a neutral gap. This can be achieved through contractionary stabilization policies, such as decreasing government spending or increasing taxes, to decrease aggregate demand and shift it to the left.

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