assume that the combined consumer goods + capital goods values for points a , b

Question

assume that the combined consumer goods + capital goods values for points a, b, and c are $20 billion, $40 billion, and $38 billion respectively. If the economy moves from point a to point b over a 14-year period, what must have been its annual rate of economic growth?

If, instead, the economy was at point c at the end of the 14-year period, by what percentage did it fall short of its production capacity?

Explanation / Answer

point a = $20 billion point b = $40 billion let annual rate of growth be 'r' => 40 = 20 x (1+r)^14 => (1+r)^14 = 2 => r = 0.051 = 5.1 % if company moves from a to c, point b = $40 billion point c = $38 billion reduction in production capacity = ((40-38)/40) x 100 = 5 %

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