In an Economy in Which Planned Aggregate Expenditure Is Given

question 46

Multiple Choice

In an economy in which planned aggregate expenditure is given by PAE = 5,500 + 0.6Y - 20,000r,the central bank is currently setting the interest rate at 0.06 (6%) .If potential output equals 11,250,the central bank must _______ the interest rate to _______ to restore full employment.

• A) lower;3%
• B) lower;4%
• C) lower;5%
• D) raise;7%
• E) raise;8%

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Definitions:

Price Index

A measure showing how prices change over time for a fixed basket of products, used to monitor inflation or deflation.

Current Year Income

The total amount of money earned by an individual or entity within the current calendar year.

1944 Dollars

The value of currency adjusted for inflation to reflect the purchasing power of the United States dollar in the year 1944.

Consumer Price Index (CPI)

A standard for measuring the weighted average expenditure on a compilation of consumer products and services such as transportation, healthcare, and food.