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

Answer 1

2.062%

Explanation:

The computation of total change in output relative to the potential for the second year is shown below:-

Before that, we need to do the following calculations

Increase in consumption = Change in consumption × Household wealth

= $0.05 × $45 billion

= $2.25

Total output = Potential GDP ÷ Multiplier effect

= $120 billion ÷ 1.1

= $109.09

Total change in output = Increase in consumption ÷ Total output

= $2.25 ÷ $109.09

= 0.02062

= 2.062%