If planned aggregate expenditure (PAE)in an economy equals 2,000 + 0.4Y and potential output (Y*)equals 3,500,then this economy has

Question

Quizplus · Accepted Answer

Potential output (Y*) is greater than planned aggregate expenditure (PAE), which means there is a gap between the economy's actual output and its potential output. This gap is known as the recessionary gap. The formula for output gap is Y* - PAE, which in this case is 3,500 - (2,000 + 0.4Y) = 1,500 - 0.4Y. Since this value is positive, it confirms that the economy has a recessionary gap. There is not enough planned expenditure to meet potential output. The income-expenditure multiplier is not relevant to this question.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 2,000