Use the following to answer questions: -(Figure: AD-AS)Refer to Figure: AD-AS.Suppose the economy is producing the output level Y_P and a negative demand shock shifts the AD₁ curve to AD₃.The economy now has a(n)_____ gap,which can be closed by _____ fiscal policy. A) inflationary;expansionary B) recessionary;contractionary C) recessionary;expansionary D) inflationary;contractionary

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The negative demand shock shifting the AD curve leftward indicates a decrease in aggregate demand, leading to a recessionary gap, where the economy is producing below potential output. To close this gap, expansionary fiscal policy, such as increased government spending or tax cuts, can be implemented to shift the AD curve back to the right. Therefore, the best choice is C, recessionary gap, which can be closed by expansionary fiscal policy.

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