If planned aggregate expenditure (PAE)in an economy equals 1,000 + 0.6Y and potential output (Y*)equals 3,000,then this economy has

Question

Quizplus · Accepted Answer

Potential output (Y*) is 3,000 and PAE is given as 1,000 + 0.6Y. At equilibrium, Y = PAE, therefore,
1,000 + 0.6Y = Y 
0.4Y = 1,000 
Y = 2,500 
Since potential output (Y*) is greater than the equilibrium output (Y), there is a recessionary gap.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 1,000