Question

Consider the following data:

PAE = 4,500 + 0.7Y – 25,000r

Interest rate = 6%

Y* = 11,750

 

The Fed should _____ the interest rate in order to close what type of gap.

Answer 1

Planned Aggregate Expenditure (PAE)

$PAE = 4,500 + 0.7\times 11,750 – 25,000\times 0.06\\ = 11225$

PAE = 11225

The Fed should increase the interest rate in order to close the recession gap.