For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):
A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.

Question

Quizplus · Accepted Answer

A decrease in planned investment shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a recessionary output gap.

For an Economy Starting at Potential Output, a Decrease in Planned