Suppose an economy's trend growth rate is 3% and current output is $10 trillion.If the economy enters a recession where output declines by 5% in one year, by how much does output have to rise to return the economy back to its trend? Assume it takes two years for the economy to return to its trend.
A)$0.5 trillion.
B)$0.6 trillion.
C)$1.4 trillion.
D)$1.7 trillion.

Question

Quizplus · Accepted Answer

The economy's trend growth rate is 3%, so in two years, output should have grown by 6%. The economy declined by 5% in one year, so it needs to grow by 11% (6% + 5%) to return to its trend. 11% of $10 trillion is $1.1 trillion. However, since it takes two years to return to its trend, the economy needs to grow by half of that amount each year, which is $0.55 trillion. Therefore, the answer is $0.55 trillion, which is closest to $0.6 trillion.

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