Question

Suppose for every dollar change in household​ wealth, consumption expenditures change by​ $0.05. If real household wealth declines by​ $45 billion, potential GDP is​ $120 billion, and the multiplier effect for the first year after an expenditure shock is​ 1.4, what is the total change in output relative to potential for the first​ year? A. minus ​1.63% B. minus ​2.63% C. minus ​2.8% D. minus ​7.0%

Answer 1

B. Minus 2.63%

Step-by-step explanation:

Increase in consumption = Change in consumption × Household wealth

= $0.05 × $45billion

= $2.25billion

Total output = Potential GDP ÷ Multiplier effect

= $120 billion ÷ 1.4

= $85.71

Total change in output = Increase in consumption ÷ Total output

= $2.25 ÷ $85.71

= $0.0263 or 2.63%