If planned aggregate expenditure (PAE)in an economy equals 2,000 + 0.48Y and potential output (Y*)equals 4,000,then this economy has

Question

Quizplus · Accepted Answer

If we subtract PAE from potential output, we can find the output gap:

Y* - PAE = Y* - (2,000 + 0.48Y)

Y* - 2,000 - 0.48Y

4,000 - 2,000 - 0.48Y

2,000 - 0.48Y

This shows that the economy has a negative output gap, indicating that actual output is below potential output. A recessionary gap occurs when actual output is below potential output, so the answer is B.

There is no information given to calculate the income-expenditure multiplier, so options D and E are not applicable.

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