Answer:
D. It will increase by 1%.
Step-by-step explanation:
Given
[tex]u_1 = 5\%[/tex] --- initial rate
[tex]u_2 = 3\%[/tex] --- final rate
Required
The effect on the GDP
To calculate this, we make use of:
[tex]\frac{\triangle Y}{Y} = u_1 - 2\triangle u[/tex]
This gives:
[tex]\frac{\triangle Y}{Y} = 5\% - 2(5\% - 3\%)[/tex]
[tex]\frac{\triangle Y}{Y} = 5\% - 2(2\%)[/tex]
[tex]\frac{\triangle Y}{Y} = 5\% - 4\%[/tex]
[tex]\frac{\triangle Y}{Y} = 1\%[/tex]
This implies that the GDP will increase by 1%
