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 2 percent (0.02) . If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.

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