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 second year after an expenditure shock is 1.1,what is the total change in output relative to potential for the second year?

Question

Quizplus · Accepted Answer

First we need to find the change in consumption expenditures caused by the decline in real household wealth:

ΔC = 0.05 x (-$45 billion) = -$2.25 billion

Then we can use the multiplier effect formula to find the total change in output for the second year:

ΔY2 = 1.1 x ($2.25 billion) = $2.475 billion

Finally, we can calculate the percentage change in output relative to potential GDP:

%ΔY2 = (ΔY2 / potential GDP) x 100% = ($2.475 billion / $120 billion) x 100% = 2.06%

But since real household wealth declined, we need to change the sign to indicate a decrease in output relative to potential:

%ΔY2 = -2.06%

Therefore, the correct answer is (C) -2.06%.

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