978-1259663048 Chapter 24 Solutions Manual

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CHAPTER 24: ECONOMIC GROWTH, BUSINESS

CYCLES, AND UNEMPLOYMENT

Questions and Exercises

1. Classicals felt that if the wage level fell, the Depression would end. They saw

2. Classical economics supported laissez-faire policies because they believed

3. Keynesians are more likely to emphasize the fallacy of composition. The fallacy

of composition is the false assumption that what is true for a part will also be true

4. Classical economics grew in importance in the 1970s because Keynesians didn’t

5. Structural stagnation is neither a Keynesian nor a Classical theory. It includes

6. Potential output is the highest amount of output an economy can sustainably

produce and sell using existing production processes and resources. Potential

7. Economic growth is measured by increases in total output and increases in output

8. Growth has slowed in recent years in both Western Europe and the United States.

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9. From 1940 to 1970 the U.S. economy grew at a rate of about 2.5 percent per year,

which was lower than Western Europe and Japan but higher than many other

10. A representative business cycle is shown in the accompanying graph. Each of the

four phases—peak, downturn, trough, and upturn—is clearly labeled.

11. Structural stagnation is a period of protracted slow growth and high

12. The structural stagnation theory is more pessimistic because it argues that the

economy must undergo structural changes before it will return to its long-term

13. Structural unemployment is unemployment caused by the institutional structure of

an economy or by economic restructuring making some skills obsolete, whereas

14. Structural unemployment, which results from changes in the structure of the

15. Cyclical unemployment, which results from fluctuations in economic activity, is

best studied in the short-run framework. Cyclical unemployment goes up and

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16. The unemployment rate is the total number of unemployed as a fraction of the

labor force.

17. Some economists argue that the standard unemployment rate underestimates

unemployment because people who have gotten frustrated and stopped trying to

find jobs are not counted as unemployed. Also, the standard unemployment rate

The official measure of unemployment is based on judgments about who should

be counted as unemployed. Keynesians argue that discouraged workers who

Questions from Alternative Perspectives

1. Austrian

Austrians believe that government’s attempts to deal with business cycles can often

2. Institutionalist

Institutionalists believe that this proposition is very reasonable. Firms’ focus on

making money and the financial issues can leave real issues secondary and can bring

about waves of pessimism and optimism. Institutionalists believe that the insight that

the production of goods is a normal daily aspect of life in all societies since the

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3. Post-Keynesian

a. Since the Great Depression, the government has been more active in the economy

b. These policies are definitely Keynesian.

c. Post-Keynesians believe that these policies are still relevant today, whereas

4. Radical

a. This is a judgment question, and judgments differ. Radical economists would

b. Radical economists believe that unemployment tends to hurt the people who are

c. Vickrey supported a plan put forward by Abba Lerner and the author of this

5. All

In natural science, there are controlled experiments which allow one to say when a

theory has failed and when it has not. In macroeconomics, controlled experiments are

Issues to Ponder

1. Deciding what is the purpose of life and therefore what constitutes a desired

lifestyle is a complicated issue. To the extent that work provides a sense of

self-worth and identity, complete idleness is not desirable. This, however, is a

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2. Reducing unemployment to 1.2 percent today is not likely for several reasons.

One is that a low inflation rate seems to be incompatible with low unemployment.

3. a. Possible explanations include Japanese cultural emphases on tradition, honor, and

loyalty. In Japan, firms are less willing to lay off workers in times of excess

b. It is impossible to say which is better. Each needs to be judged within the broader

c. The answer to this question depends on the distribution of layoffs and hires in

each of the economies. If layoffs in Japan were unavoidable and occurred among

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