If planned aggregate expenditure (PAE)in an economy equals 1,000 + 0.5Y and potential output (Y*)equals 2,200,government purchases must ________ to eliminate any output gap.

Question

Quizplus · Accepted Answer

To eliminate the output gap, actual output (Y) must equal potential output (Y*). The equation for PAE is 1,000 + 0.5Y. Setting Y = Y* = 2,200, PAE becomes 1,000 + 0.5(2,200) = 2,100. To reach potential output, PAE must equal 2,200, so government purchases must increase by 100 to close the gap.

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