3. Suppose you have $500 in savings when the price level index 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 159,
(a) By what percent did GDP decline?
(b) How much output was lost in the $14 trillion economy?
(c) How much income did this represent for each of the 300 million U.S. citizens?
(d) What was the largest GDP decline in a postwar U.S. recession? (See Table 8.1 .)
6. 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?
Economy Shrank Last Quarter
WASHINGTON—Signaling what could be the start of a prolonged recession, the government
said Thursday that the U.S. economy shrank in the July–September quarter as consumers
slashed spending and businesses pulled back.
The Commerce Department said gross domestic product, the broadest measure of goods
and services produced in the USA, fell at a 0.3% annual rate in the third quarter. Consumer
spending, two-thirds of economic activity, plummeted at a 3.1% rate—the steepest fall since
1980. The overall decline was the worst since the 2001 recession.
—Sue Kirchhoff
Source: USA TODAY, October 31, 2008, B1. Reprinted with Permission.
Analysis: Everyone agrees that the macro economy can contract on occasion. The debate is
whether such contractions self-correct or require government intervention.
IN THE NEWS
TABLE 8.1
Business Slumps
The U.S. economy has experienced
14 business slumps since 1929. In
the post–World War II period, these
downturns have been much less
severe. The typical recession lasts
around 10 months.
web analysis
To better understand the causes
of the 1973–75 recession, visit
web.mit.edu/newsoffice and
search “oil crisis.”
Analysis: Recessions
Dates Durations(months) …