If planned aggregate expenditure (PAE)in an economy equals 3,500 + 0.5Y and potential output (Y*)equals 8,000,then this economy has

Question

Quizplus · Accepted Answer

The potential output (Y*) is 8,000, but the planned aggregate expenditure (PAE) is only 3,500 + 0.5Y. This means that at the potential output, the economy would be producing and spending more than what is currently planned. This indicates a recessionary gap, which occurs when actual output is lower than potential output. The income-expenditure multiplier is not relevant for this question.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 3,500