In an Economy Where Planned Aggregate Spending Is Given by PAE

Multiple Choice

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.

A) reduce; expansionary
B) reduce; recessionary
C) raise; recessionary
D) raise; expansionary