Question

The tables below describe the employment and price level situation for the country of Gatoria over the past four years. Fill out the tables and use them to answer the following questions about how policymakers and politicians in the country might respond to such a situation.

Year	# Unemployed (in millions)	# Employed (in millions)	Unemployment Rate
2015	16	210
2016	22	205
2017	20	195
2018	18	200

1. What has been happening to the unemployment rate since 2015? Use the AS-AD model to illustrate what has happened to the economy since 2015. Assume the economy was at full employment in 2015. From this initial condition, draw a new aggregate demand curve to show how the economy has changed. Describe how the new equilibrium is different from the old one both in terms of price level and output level.
2. Some business interests are concerned about the lack of sales and profits during this time and argue that it is time to engage in strong trade restrictions including tariffs and quotas against foreign products. Would adding trade restrictions help the unemployment situation? Why or why not?
3. A few economists in Gatoria are more concerned with economic growth. Fill out the following table and use the data to calculate how much (in percentage terms) has the real GDP per capita changed in Gatoria from 2015 to 2018. Given what we know about is happening in short run from Question 1, why might focusing on improving long-run economic growth NOT be a good idea right now?

Year	Nominal GDP(in billions)	GDP Deflator	Real GDP	Pop (in millions)	Real GDP Per Capita
2015	$600	140		52
2016	$520	120		54
2017	$550	125		56
2018	$610	135		56

Answer 1

Year	# Unemployed (in millions)	# Employed (in millions)	Unemployment Rate
2015	16	210	7.08%
2016	22	205	9.69%
2017	20	195	9.30%
2018	18	200	8.26%

Since 20015 and to the year of 2018, there is a trend of increase in unemployment rate. Though, there are bigger spikes in unemployment rate in the year 2016 and 2017, and then decreasing in 2018. But, overall unemployment rate increases from 7.08% in 2015 to 8.26% in 2018.

As per the above diagram, AD curve shifts to the left and become AD1. It causes price level and real GDP to decrease at the new short run equilibrium. Here, price is P1 and real GDP is Q1.

Though there is a popular demand for the trade restrictions, but it is not going to improve unemployment  situation, because it will make domestic firms to be more inefficient, charging higher price to consumers in the absence of imported goods. It will make consumers spend more money on these goods and less money on other goods, causing further decrease in demand of goods of those industries. It will make firms to lay off more workers and unemployment further increases. It will happen due to the trade restrictions.

Year	Nominal GDP (in $ billions)	GDP Deflator	Real GDP (in $ billions)	Pop. (in millions)	Real GDP Per Capita $	Real GDP per capita growth rate
2015	600	140	428.57	52	8241.76
2016	520	120	433.33	54	8024.69	-2.63%
2017	550	125	440.00	56	7857.14	-2.09%
2018	610	135	451.85	56	8068.78	2.69%

From the above tabular data, it is showing a decrease in % growth rate in real GDP per capita in the year 2016 and 2017, but it increases in 2018. It is happening even if real GDP is increasing each year from 2015 to 2018. But, population in 2016 and 2017 is growing with faster rate than the real GDP. It is vindicated in 2018, when population does not increase, then real GDP per capita growth rate is positive in nature.

Focus on long run GDP is not a good idea, because focus should be given on increase in investments, creation of job opportunities and make some supply side policies that will increase investments. It will bring a balance and real GDP per capita will growt with positive numbers.