If planned aggregate expenditure (PAE)in an economy equals 1,000 + 0.9Y and potential output (Y*)equals 9,000, then this economy has:
A)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.

Question

Quizplus · Accepted Answer

Equilibrium occurs where PAE equals Y. In this economy, (1,000 + 0.9Y)= Y, so Y = 10,000. Since Y* = 9,000 and actual output exceeds potential output, there is an expansionary gap.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 1,000