For an economy starting at potential output, an increase 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

An increase in planned investment shifts the PAE line upward, which results in higher equilibrium output. For an economy with output equal to its potential, an increase in short run equilibrium output creates an expansionary output gap.

For an Economy Starting at Potential Output, an Increase in Planned