In the U.S. economy, suppose it is found that every 5% increase in GNP is associated with an 8% increase in S&P sales, with a negligible intercept term. Further, the net profit margin on S&P 500 is 8.2%. If the earnings multiplier on S&P 500 changes from 11.3 to 11.9 and the GNP declines by 2%, the change in the S&P
500 index value equals ________.
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A. B. C. D.D
The 2% decline in GNP will cause a decline of 2/5 * 8 = 3.2% S&P sales. This will cause a decline in earnings per share of 3.2%, too (NOT 8.2% * 3.2%). Since index value = earnings multiplier * earnings per share, the change in S&P 500 equals (1-0.032)*11.9/11.3 - 1 = +1.94%.