978-1259663048 Chapter 37 Solutions Manual

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CHAPTER 37: STRUCTURAL STAGNATION AND

GLOBALIZATION

Questions and Exercises

1. In a normal downturn, an economy is expected to recover quickly and return to its

2. The underlying growth trend determines how quickly an economy can grow

3. a. Economic output declined by 0.80.

b. The economy needs grow by 10.5 percent between years 2 and 3. To calculate the

c. The expansion necessary is more than three times the percent decline during the

d. The difference is accounted for the fact that during both the recession and the

4. The secular stagnation theory states that advanced countries will eventually stop

growing because investment opportunities will eventually be met. This slows the

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5. The economy begins with a world aggregate supply curve of WAS0 (at the world

price level of PW0) resulting in a trade deficit of Y0 – Y1. Globally-constrained

6. The economy begins with a world aggregate supply curve of WAS0 (at the world

price level of PW0) resulting in a trade deficit of Y0 – Y1. Domestic producers can

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Real output

PW0

WAS0

SAS0

SAS1

LAS0LAS1

7. If the country does not run a trade deficit, the world supply curve intersects at the

8. Globalization masks inflation by putting a ceiling on the price of domestic goods

as shown in the graph below. Domestic producers cannot charge prices higher

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Real output

WAS

SAS

LAS

9. The structural problems resulting from the financial crisis–housing overhang, a

reduction in perceived wealth, and the need to unwind expansionary policies in a

10. False. Even though jobs in the non-tradable sector do not face direct foreign

competition, the health of the non-tradable sector depends on employment and

income in the tradable sector. As incomes in the tradable sector decline, those

11. Globalization has made the distribution of income more unequal by lowering income

for the unskilled and not-highly skilled workers in the tradable sector. Workers in

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12. False. Globalization should not be restricted because while it may cause

short-term costs, there are long-term benefits to globalization. Specifically, trade

13. False. Globalization is an ongoing process in which countries gain and lose

14. Policies to deal with the long-run structural problems include (1) decreasing the

15. a. The WAS curve shifts up, shown in the graph as rise in the WAS curve from

Real output

SAS

WAS0

WAS1

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b. The SAS curve shifts down, shown in the graph as fall in the SAS curve from

SAS0 to SAS1. The trade deficit falls from Y0 – Y2 to Y0 – Y1.

Real output

WAS

SAS

c. The WAS curve shifts down, shown as decline in the WAS curve from WAS0 to

WAS1. The trade deficit rises from Y1 – Y0 to Y3 – Y2.

Real output

SAS

WAS

d. The answer, is the same as for part a. The WAS curve shifts up, shown as rise in

the WAS curve from WAS0 to WAS1. The trade deficit falls from Y0 – Y2 to Y3 –

Y1.

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Real output

SAS

WAS0

WAS1

16. Politicians do not like to propose policies that have clear downsides, and the

Questions from Alternative Perspectives

1. Radical

Structural stagnation resulted from the costs of globalization, which involved

2. Post-Keynesian

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3. Institutionalist

Globalization involved enormous adjustment costs that were disproportionately

4. Religious

In a recession, output falls only by about 3 to 5%, which in a rich society, if

the fall in income were equally divided among residents, would hardly be

5. Austrian

The bubble that led up to the U.S. structural stagnation was in large part caused

Issues to Ponder

1. This is a normative question about which opinions differ. Because people in the

United States tend to value their own well-being over the well-being of

2. Because potential output, and therefore trend growth, cannot be measured

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3. Policymakers have a difficult time coming to a compromise because both options

have significant downsides. Tax increases are unpopular and will lower disposable

4. It is difficult to say how much of a safety net could be provided. It depends on

how many people would be eligible and what programs would be offered. The

safety net could include job-training programs, income support, and a better

educational system. To begin the discussion some back-of-the-envelope

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