If planned aggregate expenditure in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r,and potential output equals 36,000,what real interest rate must the central bank set to bring the economy to full employment?
A) 2%.
B) 3%.
C) 4%.
D) 5%.
E) 6%.

Question

Quizplus · Accepted Answer

To achieve full employment, planned aggregate expenditure (PAE) must equal potential output (36,000). Setting PAE = 36,000, we solve 36,000 = 15,000 + 0.6(36,000) - 20,000r. Solving for r gives r = 0.03 or 3%.

If Planned Aggregate Expenditure in an Economy Can Be Written