In an Economy Where Planned Aggregate Spending Is Given by PAE

question 35

Multiple Choice

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02) . If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.

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

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