Consider an economy near the Indian Ocean where the main industries are agriculture and tourism. Currently, the population is 500 million people with a labor force participation rate of 68 percent and an unemployment rate is 4 percent. Economic advisors and policymakers have determined that consumers' spending behavior is described by the equation (in billions of dollars): C = 245 + 0.75DI while domestic investment behavior by firms is described by the equation (in billions of dollars): I = 180 + 0.2Y. They have also determined that the potential level of GDP is $3680 billion and the expected price level at full employment is 115. Net taxes varies over time and it is described by the equation (in billions): T = 120 + 0.2Y, while government spending is constant at $320 billion. Trade is allowed and it occurs mostly with neighboring economies. Currently total imports is $200 billion while total exports is $320 billion.
Now consider that in the following year, given the economy's earlier outcome and following recommendations from the economic advisory board, the government decreases their funding of student grants by $80 billion. At the same time, the overall population decrease by 60 million people.
Which of the following statements best describes the impact of these changes on the economy?
As a result of these changes, the economy grew and the average person's standard of living did not change.
As a result of these changes, the economy receded (decrease) and the average person's standard of living declined.
As a result of these changes, the economy remained the same and the average person's standard of living declined.
As a result of these changes, the economy remained the same and the average person's standard of living improved.
As a result of these changes, the economy receded (decrease) and the average person's standard of living improved.
As a result of these changes, the economy remained the same and the average person's standard of living did not change.
As a result of these changes, the economy receded (decrease) and the average person's standard of living did not change.
As a result of these changes, the economy grew and the average person's standard of living improved.
As a result of these changes, the economy grew and the average person's standard of living declined.