Question 7 (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 = Ypot + 80(P - Pe). 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.
Which of the following statements best describes the economy's current state?
The unemployment rate is greater than to 5 percent and the typical person's standard of living has declined
from 2016 to 2018.
The unemployment rate is equal to 5 percent and the typical person's standard of living has declined from
2016 to 2018.
The unemployment rate is less than to 5 percent and the typical person's standard of living has declined
from 2016 to 2018.
The unemployment rate is less than 5 percent and the typical person's standard of living has improved from
2016 to 2018.
The unemployment rate is equal to 5 percent and the typical person's standard of living has remained the
same from 2016 to 2018.
The unemployment rate is less than 5 percent and the typical person's standard of living has remained the
same from 2016 to 2018.
The unemployment rate is greater than 5 percent and the typical person's standard of living has improved
from 2016 to 2018.
The unemployment rate is equal to 5 percent and the typical person's standard of living has improved from
2016 to 2018.
The unemployment rate is greater than 5 percent and the typical person's standard of living has remained
the same from 2016 to 2018.
