Question

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750, the central bank must ______ the interest rate to close the ____________ gap. reduce; expansionary reduce; recessionary raise; recessionary raise; expansionary

Answer 1

Reduce; Recessionary

Step-by-step explanation:

We need to emphasize the fact that fiscal policy is the use of government spending and tax policy to alter economy.

A recessionary gap can be defined as a microeconomic term which describes an economy operating at a level below its full employment equilibrium. Under a recessionary gap condition, the level of real gross domestic product GDP is lower than the level of full employment, which puts downwards pressure on prices in the long run.