In an Economy Where Planned Aggregate Spending Is Given by PAE

question 36

Multiple Choice

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05) . If potential output equals 11,750, the central bank must ________ the interest rate to close the ________ gap.

• A)reduce; expansionary
• B)reduce; recessionary
• C)raise; recessionary
• D)raise; expansionary

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