In a certain economy,the components of planned aggregate expenditure are given by:
C = 60 + 0.6(Y - T)- 1,000r
I = 200 - 1,000r
G = 200
NX = 50
If potential output equals 1,025,net taxes equal 100 and the central bank sets the interest rate equal to 0.05 (5%),then the bank must _______ the interest rate to ________ to restore full employment.
A) raise;6%
B) raise;7%
C) lower;4%
D) lower;3%
E) lower;2%

Question

Quizplus · Accepted Answer

To restore full employment, the central bank must lower the interest rate to 2%. At 5%, planned aggregate expenditure is below potential output, so lowering the interest rate increases consumption and investment, raising aggregate expenditure to match potential output.

In a Certain Economy,the Components of Planned Aggregate Expenditure Are