In an Economy Where Planned Aggregate Spending Is Given by PAE

Multiple Choice

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.06 (6 percent) . If potential output equals 9,500, the central bank must ________ the interest rate to close the ________ gap.

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