If Planned Aggregate Expenditure (PAE)in an Economy Equals 2,000

question 114

Multiple Choice

If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.5Y and potential output (Y*) equals 4,400,government purchases must ________ to eliminate any output gap.

• A) increase by 20
• B) increase by 200
• C) increase by 250
• D) decrease by 200
• E) decrease by 250

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Definitions:

Income and Substitution Effects

The changes in consumer behavior resulting from changes in relative prices and purchasing power, affecting choices between goods.

Utility Function

A mathematical representation of how a series of choices provides different levels of happiness or satisfaction to an individual or entity.

Budget Constraint

An economic model that represents all the combinations of goods and services that a consumer can afford, given their income and prices of goods.

Relative Prices

The price of one good or service compared to another, usually indicating how many units of one good you can exchange for a unit of another.