In an Economy Where Aggregate Spending Is Given by Y

question 136

Multiple Choice

In an economy where aggregate spending is given by Y = 3,000 + .75Y - 10,000 r, the central bank is currently setting the interest rate at 0.06 (6 percent) . If potential output equals 9,500, the central bank must ____ the interest rate to close the __________ gap.

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

---

Definitions:

Increase Taxes

Refers to a government's decision to raise the percentage of compulsory contributions on personal or corporate income, goods, services, or transactions, often aimed at financing government expenses.

Lower Interest Rates

A monetary policy strategy where central banks reduce the cost of borrowing money in an effort to stimulate economic growth.

Crowding Out

A situation in which increased government spending leads to a reduction in private sector spending and investment.

Contractionary Gap

A situation where an economy's real GDP is lower than its potential GDP, indicating underutilization of resources.