If planned aggregate expenditure (PAE)in an economy equals 5,000 + 0.6Y and potential output (Y*)equals 13,000,then this economy has:

Question

Quizplus · Accepted Answer

We can find the equilibrium output (Y) by setting PAE equal to Y:

PAE = Y

5,000 + 0.6Y = Y

0.4Y = 5,000

Y = 12,500

Since potential output (Y*) is 13,000, we can see that the actual output (Y) is below potential.

Output gap = Y* - Y

Output gap = 13,000 - 12,500

Output gap = 500

Since the actual output is less than potential output, we have a recessionary gap.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 5,000