An economy with a potential output Y* of 4,000 is described by the equation below: (LO5)

Y 5 5,800 212,000r

a. If real interest rate is 0.10 (10%), compute the numerical value for aggregate expenditure and output Y, and determine if the economy is at its potential or experiencing an output gap.

b. If real interest rate is 0.20 (20%), compute the numerical value for aggregate expenditure and output Y, and determine if the economy is at its potential or experiencing an output gap.

c. At what value should the Fed set the real interest rate to eliminate any output gap and achieve its potential?