*All work and answers must be shown to get 5 stars* A real-world problem faced b
ID: 1176362 • Letter: #
Question
*All work and answers must be shown to get 5 stars*
A real-world problem faced by policymakers, forecasters,
and businesses every day is how to judge the state of the economy. Consider
the table below, showing hypothetical measures of real GDP in the coming
years, starting at a level of $17.0 trillion in 2015.
Now fill in the remaining columns of the table by answering the following
questions.
(a) What is potential output in 2015? You could call this a trick question, since
there%u2019s no way for you to know the answer! In a way, that%u2019s the main point:
fundamentally, we have to take some other measurements and make some
assumptions. Suppose your research assistant tells you that in 2015, busi-
ness surveys, unemployment reports, and recent years%u2019 experience suggest
that the economy is operating at potential output. So go ahead and write
17.0 for potential in this year.
(b) Assume potential output grows at a constant annual rate of 3.5%, and
complete the remainder of the table.
(c) Comment on the state of the economy in each year. When does the economy
enter a recession? When does the recession end?
(d) How is your answer in part (c) related to the growth rate of actual output
in the last column of the table?
Explanation / Answer
potential output grows by a factor of 1.035 every year
17
17.595
18.2108
18.8482
19.507
20.190
20.897
the country fall in recession in 2017 because then actual output < potential output and it ends in 2021 when actual > potential output
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