If planned aggregate expenditure equals 5,000 + 0.55Y and potential output (Y*)equals 12,000,then this economy has a(n)__________ gap that can be closed by _________.

Question

Quizplus · Accepted Answer

The economy is experiencing a recessionary gap because potential output (Y*) is higher than planned aggregate expenditure. To close this gap, government purchases should be increased through expansionary fiscal policy. This will increase aggregate demand and help bring the economy towards potential output. Increasing taxes would cause a contraction in overall spending and would not be expansionary. Increasing transfer payments could stimulate spending, but it would not be as effective as direct government spending.

If Planned Aggregate Expenditure Equals 5,000 + 0