If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?
A)2 percent
B)3 percent
C)4 percent
D)5 percent

Question

Quizplus · Accepted Answer

If PAE = 15,000 + 0.6Y − 20,000r, and Y = 35,000 at full employment, then 20,000r = 15,000 + 0.6(35,000)− 35,000. Solving for the real interest rate, r = 1,000/ 20,000 = 0.05, or 5 percent.

If Planned Aggregate Spending in an Economy Can Be Written