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8 October, 13:13

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment? 2 percent 3 percent 4 percent 5 percent

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  1. 8 October, 14:00
    0
    3 percent.

    Explanation:

    Given that,

    Potential output, Y = 36,000

    Planned aggregate expenditure:

    PAE = 15,000 + 0.6Y - 20,000r

    We can rewrite the above equation as follows:

    Y = 15,000 + 0.6Y - 20,000r

    Y - 0.6Y = 15,000 - 20,000r

    0.4Y = 15,000 - 20,000r

    Now, we are substituting the value of potential output,

    0.4 (36,000) = 15,000 - 20,000r

    14,400 = 15,000 - 20,000r

    20,000r = 15,000 - 14,400

    r = 600 : 20,000

    = 0.03 or 3%

    Therefore, the Federal Reserve must set the real interest rate at 3% to bring the economy to full employment.
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