If planned aggregate expenditure (PAE )in an economy equals 2,000 + 0.8Y and potential output (Y*)equals 11,000, 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, (2,000 + 0.8Y)= Y, so Y = 10,000. Since Y* = 11,000 and actual output falls short of potential output, there is a recessionary gap.

If Planned Aggregate Expenditure (PAE )In an Economy Equals 2,000