Suppose an economy is in short-run equilibrium at $Y_1$ and $PL_1$ as shown in the figure above, select which of the statements from the choices below is true:
I.an inflationary gap exists
II.the inflationary gap can be reduced by implementing contractionary monetary policy, that shifts $AD_1$ to $AD_2$
III. a contractionary monetary policy will lower the equilibrium price level
IV.implementing contractionary monetary policy can transform the inflationary gap into a recessionary gap