If planned aggregate expenditure (PAE) in an economy equals 2000 + 0.8Y and potential output (Y*) equals 9000, then this economy has:Group of answer choicesa recessionary gap.an expansionary gap.no induced expenditure.no autonomous expenditure.No output gap.
Question
If planned aggregate expenditure (PAE) in an economy equals 2000 + 0.8Y and potential output (Y*) equals 9000, then this economy has:Group of answer choicesa recessionary gap.an expansionary gap.no induced expenditure.no autonomous expenditure.No output gap.
Solution 1
The correct answer is: "a recessionary gap."
Here's a step-by-step explanation:
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Planned aggregate expenditure (PAE) is the total planned spending in an economy, given by the equation PAE = 2000 + 0.8Y, where Y is the level of income or output.
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Potential output (Y*) is the level of output that an economy can produce at a constant inflation rate. In this case, Y* is given as 9000.
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To find the level of equilibrium output (Y), we set PAE equal to Y and solve for Y. Doing so gives us the equation 2000 + 0.8Y = Y. Solving this equation for Y gives us Y = 10000.
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Comparing the equilibrium output (Y = 10000) with the potential output (Y* = 9000), we see that the equilibrium output is less than the potential output.
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This means that the economy is producing less than it could at a constant inflation rate, which is known as a recessionary gap.
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Therefore, the correct answer is: "a recessionary gap."
Solution 2
The correct answer is: "a recessionary gap."
Here's a step-by-step explanation:
-
Planned aggregate expenditure (PAE) is the total planned spending in an economy, given by the equation PAE = 2000 + 0.8Y, where Y is the level of income or output.
-
Potential output (Y*) is the level of output that an economy can produce at a constant inflation rate. In this case, Y* is given as 9000.
-
To find the level of equilibrium output (Y), we set PAE equal to Y and solve for Y. Doing so gives us the equation 2000 + 0.8Y = Y. Solving this equation for Y gives us Y = 10000.
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Comparing the equilibrium output (Y = 10000) with the potential output (Y* = 9000), we see that the equilibrium output is greater than the potential output.
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This means that the economy is producing more than it could at a constant inflation rate, which is known as an expansionary gap.
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Therefore, the correct answer is: "an expansionary gap."
Similar Questions
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Consider a simple economy with no government or external sector. Assume that in this economy the consumption (and thus saving) plans of households are always realized. Assume for the current period this economy is characterized by the following data:Y = 2800, Cp = 1800 and Ip = 400where Y is output, Cd is consumption and Ip is planned investment. In this caseGroup of answer choicesoutput is at its equilibrium level but planned saving and planned investment are unequalaggregate planned expenditure is greater than outputtotal investment recorded in the national accounts would be 1000output is not at its equilibrium level and total investment will be smaller than planned investment.
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