Question

If planned aggregate expenditure (PAE) in an economy equals 2,000 0.8Y and potential output (Y*) equals 11,000, then this economy has

Answer 1

Answer: a recessionary gap

Explanation:

Equilibrium occurs where the planned aggregate expenditure is equals to the income Y.

Therefore, based on the question given, for this economy,

(2,000 + 0.8Y) = Y

Y - 0.8Y = 2000

0.2Y = 2000

Y = 2000/0.2

Y = 10,000.

Since potential output Y* is given as 11,000, then there's a recessionary gap since the actual output is lower than the potential output.