In an economy where aggregate spending is given by Y = 3,000 + .75Y - 10,000 r, the central bank is currently setting the interest rate at 0.05 (5 percent). If potential output equals 10,800, the central bank must ____ the interest rate to close the _________ gap.

Question

Quizplus · Accepted Answer

If potential output is 10,800, this economy has a recessionary gap. Y = 3,000 + 0.75 (Y) - 10,000(0.05), so 0.25Y = 2,500 and Y = 10,000. This is a recessionary gap of 800 and interest rates must be lowered to close the gap.

In an Economy Where Aggregate Spending Is Given by Y