If the equation for planned aggregate expenditure is given by PAE = 4,000 + 0.6Y and potential output is equal to 10,500,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

- First, we need to calculate the current equilibrium output by setting PAE equal to actual output (Y): 
4,000 + 0.6Y = Y 
0.4Y = 4,000 
Y = 10,000

- There is a recessionary gap because potential output (10,500) is greater than the current equilibrium output (10,000) by 500 units.

- To return to potential output (assuming no changes to other variables), we need net exports to increase by 200 units (since 0.2 multiplied with 1,000 in not an whole number.)

- Therefore, option D is correct: recessionary gap of 500 units and net exports need to increase by 200 units.

If the Equation for Planned Aggregate Expenditure Is Given by PAE