Question 9 (4 points)
Consider an open economy where the population is 400 million in 2016. Based on research conducted by the
Department of Economic Analysis, the potential level of real GDP is $7500 billion, the natural rate of
unemployment is 5 percent, and the expected price level is 108. In addition, the researchers estimate the short-
run aggregate supply is described by the estimated equation: $Y = Y_{pot} + 80(P-P_e)$. In 2016, consumption
spending in billions of dollars, is described by the equation: $C = 650 + 0.8DI$. Government spending was fixed at
$1700 billion and firms' investment behavior was fixed at $1000 billion. Trading is allowed in this economy and in
2016, total exports was $2000 billion while total imports was $2500 billion. Total taxes collected by the
government in 2016 was $1500 billion.
Consider that in 2018, after two years with the policymakers doing nothing and no additional shocks occurring,
the equilibrium level of GDP is $7,750 billion and the overall price level is 121.88. Additionally, the population fell
by 8 percent as a result of increased emigration.
As the economy continues to adjust 2018 with no government intervention and no shocks to the economy, which
of the following should be a greater concern for the government and and policymakers?
Unemployment.
Real output (production).
Inflation.
Household spending.
