Question.2917 - 3. Suppose you have $7,000 in savings when the price level i n dex is at 100. ( a ) If inflation pushes the price level up by 10 percent, what will be the real value of your savings? ( b ) What is the real value of your savings if the price level declines by 10 percent?5. According to the News on page 162, ( a ) By what percentage did GDP decline in the fourth quarter of 2008? % ( b ) At that rate, how much output would have been lost in the $14 trillion economy of 2008? $ ( c ) How much income did this represent for each of the 300 million U.S. citizens? $ ( d ) What was the largest percentage GDP decline in a post–World War II U.S. recession? (See Table 8.1.) Page 162 Economy: Sharpest Decline in 26 Years The U.S. economy suffered its biggest slowdown in 26 years in the last three months of 2008, according to the government’s first reading about the fourth quarter released Friday. Gross domestic product, the broadest measure of the nation’s economic activity, fell at an annual rate of 3.8 percent in the fourth quarter, adjusted for inflation. That’s the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4 percent decline. . . . Hit by tight credit and soaring job losses, Americans slammed the brakes on spending in the quarter. Consumer spending fell at a 3.5 percent annual rate, which was the se v enth-biggest drop on record. Spending on big-ticket durable goods plunged at a 22 percent pace, the largest d e cline since 1987. Consumer spending accounts for more than two-thirds of overall economic activity. Analysis: Everyone agrees that the macro economy can contract on occasion. The debate is whether such contractions self-correct or require government intervention. A MODEL OF THE MACRO ECONOMY The bumpy growth record of the U.S. economy lends some validity to the notion of a recurring business cycle. Every decade seems to contain at least one boom or bust cycle. But the historical record doesn’t really answer our key questions. Are business cycles inevitable? Can we do an y thing to control them? Keynes and the classical economists weren’t debating whether business cycles occur but whether they are an appropriate target for government intervention. That debate continues. To determine whether and how the government should try to control the business cycle, we first need to understand its origins. What causes the economy to expand or contract? What market forces dampen (self-adjust) or magnify economic swings? Figure 8.4 sets the stage for answering these questions. This di a gram provides a bird’seye view of how the macro economy works. This basic macro model emphasizes that the performance of the economy d e pends on a surprisingly small set of determinants. On the right side of Figure 8.4 the primary measures of macroec o nomic performance are arrayed. These basic macro outcomes include • Output: total value of goods and services produced (real GDP). • Jobs: levels of employment and unemployment. • Prices: average price of goods and services (inflation). • Growth: year-to-year expansion in production capacity. • International balances: international value of the dollar; trade and payment balances with other countries. These macro outcomes define our economic welfare; we measure our economic well-being in terms of the value of output produced, the number of jobs created, price stability, and rate of economic expansion. We also seek to maintain a certain balance in our international trade and financial relations. The economy’s performance is rated by the “scores” on these five macro outcomes. On the left side of Figure 8.4 three very broad forces that shape macro outcomes are depicted. These determinants of macro performance are • Internal market forces: population growth, spending behavior, invention and innovation, and the like.Table 8.1 DATES Duration (months) % decline in real GDP Peak unemployment rate Aug. 1929–Mar. 1933 43 35.4% 24.9% May 1937–June 1938 13 9.4 20.0 Feb. 1945–Oct. 1945 8 23.8 4.3 Nov. 1948–Oct. 1949 11 9.9 7.9 July 1953–May 1954 10 10.0 6.1 Aug. 1957–Apr. 1958 8 14.3 7.5 Apr. 1960–Feb. 1961 10 7.2 7.1 Dec. 1969–Nov. 1970 11 8.1 6.1 Nov. 1973–Mar. 1975 16 14.7 9.0 Jan. 1980–July 1980 6 8.7 7.6 July 1981–Nov. 1982 16 12.3 10.8 July 1990–Feb. 1991 8 2.2 6.5 Mar. 2001–Nov. 2001 8 0.6 5.6 Dec. 2007–June 2009 18 4.1 10.16. If the AS curve shifts to the right, what happens (“increases” or “decreases”) to ( a ) The equilibrium rate of output? ( b ) The equilibrium price level?
Answer Below:
Suppose xxx have xx savings xxxx the xxxxx levelindex xx at x If xxxxxxxxx pushes xxx price xxxxx up xx percent xxxx will xx the xxxx value xx yoursavings xxxxxx Given xxxx inflation xxx increased xxx price xxxxxx by xxxxxxx the xxxxx level xxxxx becomes xxx we xxxx that xxxx Savings xxxxxxx Savings xxxxx Level xxxx Nominal xxxxxxx Price xxxxx Therefore xxxx Savings xx conclude xxxx the xxxxx level xxxxxxxx of xxxxxxx the xxxxx of xxxx savings xxxx fall xx b xxxx is xxx real xxxxx of xxxx savings xx the xxxxx level xxxxxxxx by xxxxxxx Answer xxxxx that xxx price xxxxxx have xxxxxxxx by xxxxxxx the xxxxx level xxxxx becomes x Now xx know xxxx Real xxxxxxx Nominal xxxxxxx Price xxxxx Here xxxxxxx Savings xxxxx Level xxxxxxxxx Real xxxxxxx To xxxxxxxx with xxx price xxxxx decline xx percent xxx value xx real xxxxxxx will xxxxxxxx to xxxxxxxxx to xxx News xx page x By xxxx percentage xxx GDP xxxxxxx in xxx fourth xxxxxxx of xxxxxx The xxx fell xx an xxxxxx rate xx percent xx the xxxxxx quarter xx b xx that xxxx how xxxx output xxxxx have xxxx lost xx the xxxxxxxx economy xx Answer xx the xxxx of xxxxxxx the xxxxxx loss xx a xxxxxxxx economy xx amounts xx billion x How xxxx income xxx this xxxxxxxxx for xxxx of xxx million x S xxxxxxxx Answer xxx per xxxxxx loss xx income xxxx be xxxxx to xxx total xxxx in xxxxxx divided xx the xxxxx population xxxxxxxxx the xxx capita xxxx d xxxx was xxx largest xxxxxxxxxx GDP xxxxxxx in x post xxxxx World xxx II x S xxxxxxxxx See xxxxx Answer xxx largest xxxxxxxxxx GDP xxxxxxx in x post-World xxx II xxxxxxxx during xxx period xxxxxxx Nov xxxxx Mar xxxx the xxxx GDP xxxxxxxxx to xxxxxxx Page xxxxxxx Sharpest xxxxxxx in xxxxx The x S xxxxxxx suffered xxx biggest xxxxxxxx in xxxxx in xxx last xxxxx months xx according xx the xxxxxxxxxx rsquo x first xxxxxxx about xxx fourth xxxxxxx released xxxxxx Gross xxxxxxxx product xxx broadest xxxxxxx of xxx nation xxxxx s xxxxxxxx activity xxxx at xxxxxxxx rate xx percent xx the xxxxxx quarter xxxxxxxx for xxxxxxxxx That xxxxx s xxx largest xxxx in xxx since xxx first xxxxxxx of xxxx the xxxxxxx suffereda xxxxxxx decline xxx by xxxxx credit xxx soaring xxx losses xxxxxxxxx slammed xxx brakes xx spending xx thequarter xxxxxxxx spending xxxx at x percent xxxxxx rate xxxxx was xxx seventh-biggest xxxxxx record xxxxxxxx on xxxxxxxxxx durable xxxxx plunged xx a xxxxxxx pace xxx largestd x cline xxxxx Consumer xxxxxxxx accounts xxx more xxxx two-thirds xx overalleconomic xxxxxxxx Analysis xxxxxxxx agrees xxxx the xxxxx economy xxx contract xx occasion xxx debate xxxxxxxxx such xxxxxxxxxxxx self-correct xx require xxxxxxxxxx intervention x MODEL xx THE xxxxx ECONOMY xxx bumpy xxxxxx record xx the x S xxxxxxx lends xxxx validity xx the xxxxxx of x recurringbusiness xxxxx Every xxxxxx seems xx contain xx least xxx boom xx bust xxxxx But xxxxxxxxxxxxx record xxxxx rsquo x really xxxxxx our xxx questions xxx business xxxxxx inevitable xxx we xx an x thing xx control xxxx Keynes xxx the xxxxxxxxx economists xxxxx rsquo x debatingwhether xxxxxxxx cycles xxxxx but xxxxxxx they xxx an xxxxxxxxxxx target xxx governmentintervention xxxx debate xxxxxxxxx To xxxxxxxxx whether xxx how xxx government xxxxxx try xx control xxx business xxxxx we xxxxx need xx understand xxx origins xxxx causes xxx economy xx expand xx contract xxxx market xxxxxx dampen xxxxxxxxxxx or xxxxxxx economic xxxxxx Figure xxxx the xxxxx for xxxxxxxxx these xxxxxxxxx This xx a xxxx provides x bird xxxxx seyeview xx how xxx macro xxxxxxx works xxxx basic xxxxx model xxxxxxxxxx that xxxxxxxxxxxxxx of xxx economy x e xxxxx on x surprisingly xxxxx set xx determinants xx the xxxxx side xx Figure xxx primary xxxxxxxx of xxxxxxxxxxxxx performance xxxxxxxxxx These xxxxx macro xxxxxxxx include xxxx Output xxxxx value xx goods xxx services xxxxxxxx real xxx bull xxxx levels xx employment xxx unemployment xxxx Prices xxxxxxx price xx goods xxx services xxxxxxxxx bull xxxxxx year-to-year xxxxxxxxx in xxxxxxxxxx capacity xxxx International xxxxxxxx international xxxxx of xxx dollar xxxxx and xxxxxxx balanceswith xxxxxxxxxxxxxx These xxxxx outcomes xxxxxx our xxxxxxxx welfare xx measure xxx economic xxxxxxxxxxxx terms xx the xxxxx of xxxxxx produced xxx number xx jobs xxxxxxx price xxxxxxxxx andrate xx economic xxxxxxxxx We xxxx seek xx maintain x certain xxxxxxx in xxx internationaltrade xxx financial xxxxxxxxx Theeconomy xxxxx s xxxxxxxxxxx is xxxxx by xxx ldquo xxxxxx rdquo xx thesefive xxxxx outcomes xx the xxxx side xx Figure xxxxx very xxxxx forces xxxx shape xxxxx outcomes xxxxxxxxxxx These xxxxxxxxxxxx of xxxxx performance xxx bull xxxxxxxx market xxxxxx population xxxxxx spending xxxxxxxx invention xxx innovation xxx the xxxx Table xxxxx Duration xxxxxx decline xx real xxx Peak xxxxxxxxxxxx rate xxx ndash xxx May xxxxx June xxx ndash xxx Nov xxxxx Oct xxxx ndash xxx Aug xxxxx Apr xxx ndash xxx Dec xxxxx Nov xxx ndash xxx Jan xxxxx July xxxx ndash xxx July xxxxx Feb xxx ndash xxx Dec xxxxx June xx the xx curve xxxxxx to xxx right xxxx happens xxxxx increases xxxxx or xxxxx decreases xxxxx to x shift xx the xx the xx Aggregate xxxxxx curve xxx be xxxxxxxxxx to xxx reasons xxxxx changes xx the xxxxx prices xxx technology xxxxxx A xxxxxxxxx shift xx the xx curve xxxxxxx either x decrease xx input xxxxxx or x technological xxxxxxxxxxx leading xx lower xxxxxxxxxx costs xxxxxxxxxxxx the xxxxx production xxxx will xxxx an xxxxxxxx in xx and xxxxx the xxxxxxxxx shift xxx opposite xx true xxx a xxxxxxxx shift xx the xx curve x The xxxxxxxxxxx rate xx output xxxxxx As xxx AS xxxxxxxxx Supply xxxxx shifts xx the xxxxx the xxxxxxxxxxx rate xx output xxxxxxxxx from x to x rsquo x The xxxxxxxxxxx price xxxxx Answer xx the xx Aggregate xxxxxx curve xxxxxx to xxx right xxx equilibrium xxxxx level xxxxxxxxx from x to x rsquoMore Articles From Economics
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