Refer to the accompanying figure. Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is ________, and ________ could return the economy to potential output (Y*).
A)an expansionary gap; a decrease in autonomous expenditures of 1,000
B)an expansionary gap; a decrease in autonomous expenditures of 4,000
C)a recessionary gap; an increase in autonomous expenditures of 1,000
D)a recessionary gap; an increase in autonomous expenditures of 4,000

Question

Refer to the accompanying figure.  Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is ________, and ________ could return the economy to potential output (Y*).
A)an expansionary gap; a decrease in autonomous expenditures of 1,000 
B)an expansionary gap; a decrease in autonomous expenditures of 4,000 
C)a recessionary gap; an increase in autonomous expenditures of 1,000 
D)a recessionary gap; an increase in autonomous expenditures of 4,000

Quizplus · Accepted Answer

There is a recessionary gap because Y* is greater than equilibrium output of 16,000. An upward shift of the PAE line by 1,000 would move the short-run equilibrium output to 20,000, or Y*.

Refer to the Accompanying Figure