If the equation for planned aggregate expenditure is given by PAE = 5,000 + 0.9Y and potential output is equal to 55,000,then there is a(n)________ gap equal to ________ units,so if net exports ________ by ________,the economy will return to potential output.

Question

Quizplus · Accepted Answer

- We can calculate the output gap by subtracting potential output (55,000) from planned aggregate expenditure at that level of output (PAE = 5,000 + 0.9Y where Y = 55,000)
- PAE = 5,000 + 0.9(55,000) = 50,500
- Output gap = 50,500 - 55,000 = -4,500
- A negative output gap implies a recessionary gap, meaning that output is below potential output and the economy is not operating at full capacity. So options A, B, and C can be eliminated.
- To return to potential output, net exports need to increase. This can be achieved by a decrease in net exports (option D) or an increase in net exports (option E).
- However, option E involves a smaller change in net exports (50) compared to option D (500), which may not be sufficient to close the output gap. Therefore, option D is the best choice.

If the Equation for Planned Aggregate Expenditure Is Given by PAE