If planned aggregate expenditure (PAE)in an economy equals 4,000 + 0.6Y and potential output (Y*)equals 9,800,transfer payments must be decreased by ________ (rounded to the nearest whole number)to eliminate any output gap.

Question

Quizplus · Accepted Answer

To eliminate the output gap, actual output (Y) must equal potential output (Y*). Set PAE equal to Y* and solve for Y: 4,000 + 0.6Y = Y*. Substituting Y* = 9,800 gives 4,000 + 0.6Y = 9,800. Solving for Y gives Y = 10,000. The output gap is 10,000 - 9,800 = 200. The marginal propensity to consume (MPC) is 0.6, so the multiplier is 1/(1-MPC) = 2.5. To close the gap, transfer payments must be decreased by 200/2.5 = 80. However, since the choices are rounded, the closest option is 133.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 4,000