4 The US is in a recession once every 10 years What is the e

4. The U.S. is in a recession once every 10 years. What is the expected growth rate if GDP growth averages 3% per year in expansions and -2% in recession years?

Solution

Let r = expected growth rate.

Thus, in 10 years, 9 times usually we have expansions, and just once we have recession.

(1+r)^10 = (1+0.03)^9 * (1-0.02)

(1+r)^10 = 1.27867772

1+r = 1.024887296

r = 0.024887296 or 2.4887% [ANSWER]