If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?
A) 0.02
B) 0.03
C) 0.04
D) 0.05

Question

Quizplus · Accepted Answer

To achieve full employment, planned aggregate expenditure (PAE) must equal potential output (36,000). Setting PAE = 36,000 and solving for r: 36,000 = 15,000 + 0.6(36,000) - 20,000r. Solving gives r = 0.03.

If Planned Aggregate Spending in an Economy Can Be Written