Question36 Suppose a negative aggregate demand shock causes short-run output to drop to -1 percent. To stimulate investment and bring the economy back to potential output, the interest rate decreases by 1 percentage point. However, as a result, investment increases more than expected and short-run output reaches 1 percent. This result could be caused by a decrease in the import share of potential output. All of these are correct. an increase in the government purchases share of potential output. an increase in the consumption share of potential output. the presence of a consumption multiplier. ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The scenario centers on a negative demand shock that reduces output to -1% and then a policy-driven easing that raises output to +1%, suggesting an amplified domestic spending response. 
Option a: a decrease in the import share of potential output. If imports as a share of potential output falls, a larger fraction of spending stays within the domestic economy, boosting the domestic expenditure multiplier. This makes a stronger rebound in output plausible, so this factor could contribute to the observed outcome. 
Option b: All of these are correct. Since each potential factor could plausibly strengthen the fiscal or monetary transmission channels (and hence the multiplier effect), it is reasonable to consider them simultaneously as possible contributors to the result. 
Option c: an increase in the government purchases share of potential output. A higher share of government purchases in potential output raises autonomous demand and can directly lift aggregate demand, helping restore output toward potential. This mechanism is standard in explaining rapid rebounds when policy spending increases. 
Option d: an increase in the consumption share of potential output. If a larger portion of potential output is allocated to consumption, households’ spending can rise, further boosting aggregate demand and reinforcing the recovery. This is another viable channel for a bigger-than-expected rebound. 
Option e: the presence of a consumption multiplier. The existence of a consumption (and broader) multiplier is the core reason a small policy shift can produce a larger shift in aggregate demand and output, making the observed jump from -1% to +1% consistent with multiplier reasoning. 
Taken together, each option offers a plausible mechanism by which demand could be amplified and output could overshoot toward potential; therefore, stating that all of these are correct aligns with the idea that multiple channels can reinforce the rebound.

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