Refer to Exhibit 15-5. Assume that the economy starts out in short-run equilibrium. An economist who believes that the economy is not self-regulating would assert that the government should use fiscal policy to close the existing gap.

b. Contractionary; Inflationary gap

Explanation:

If the economy starts out at the short-run, the GDP would be higher than the GDP if we were using the Long Run Aggregate Supply Curve which shows what the potential GDP is.

This means that the Actual GDP is higher than the potential GDP and when this happens there will be an inflationary gap because prices will be higher than they should be as the economy is overheated.

In order to close this inflationary gap, the government should embark on contractionary fiscal policies that would reduce economic activity and bring GDP down to the potential level.

i'ts proportional. if the inflation rate is 12% for example, the cpi will be 12% less.

hope it ,

bioteacher101