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 third year after an expenditure shock is 0.7,what is the total change in output relative to potential for the third year?

Question

Quizplus · Accepted Answer

The change in consumption is $45 billion * 0.05 = $2.25 billion. The total change in output is $2.25 billion * 0.7 = $1.575 billion. Relative to a potential GDP of $120 billion, the percentage change is ($1.575 billion / $120 billion) * 100% = 1.31%.

Suppose for Every Dollar Change in Household Wealth,consumption Expenditures Change