If Aggregate Spending in an Economy Can Be Written as Y

question 119

Multiple Choice

If aggregate spending in an economy can be written as Y = 15,000 + 0.6Y - 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

• A) 2 percent
• B) 3 percent
• C) 4 percent
• D) 5 percent

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Definitions:

Real Interest Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing or the true return on investment.

Nominal Interest Rates

are the stated interest rates on financial products or loans, not adjusted for inflation, indicating the actual rate of interest charged by lenders.

Real Interest Rates

The interest rate adjusted for inflation, reflecting the real cost of borrowing and the true return on savings.

Tax-exempt Interest Payments

Interest income that is not subject to federal income tax.