# Macro Equilibrium and Business Cycle Problems

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?

4. According to the News on page 162 (attached)

( 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?

8. Assume that the accompanying graph depicts aggregate supply and demand conditions in

an economy. Full employment occurs when $6 trillion of real output is produced.

( a ) What is the equilibrium rate of output?

( b ) How far short of full employment is the equilibrium rate of output?

( c ) Illustrate a shift of aggregate demand that would change the equilibrium rate of output

to $6 trillion. Label the new curve AD 2 .

( d ) What is the price level at this full-employment equilibrium?

( e ) Illustrate a shift of aggregate supply (AS 2 ) that would, when combined with AD 1 ,

move equilibrium output to $6 trillion.

( f ) What is the price level at this new equilibrium

#### Solution Preview

3. a) What this price level represents is that it takes $1.10 to buy what used to cost $1.00. In order to apply this to our savings account, we use the formula: (7000/1.10) = 6363.63.

b) This price level means that it only takes $0.90 to buy what used to cost $1.00. To apply this to our savings account, we use the formula: (7000/0.90) = 7777.77.

4. a) There are 2 ways to look at this question: the article states that the GDP declined at an "annual rate" of 3.8% in the 4th quarter. What this means is that ...

#### Solution Summary

Macro equilibrium and business cycle problems are examined. The real value of the saving in the price level declines are provided.