Suppose an economy's trend growth rate is 3 percent and current output is $10 trillion. If the economy enters a recession where output declines by 5 percent in one year, by how much does output have to rise to return to its trend? Assume it takes two years for the economy to return to its trend.

Question

Quizplus · Accepted Answer

The economy's trend growth rate is 3 percent, so its trend output in two years will be $10 trillion * (1 + 0.03)^2 = $10.609 trillion. To return to its trend, output must rise by $10.609 trillion - $10 trillion = $0.609 trillion.

Suppose an Economy's Trend Growth Rate Is 3 Percent and Current