Question 1

According to the structural stagnation hypothesis, expansionary macro policy tends to lead to:

Accepted Answer

The structural stagnation hypothesis suggests that in an economy with underlying structural issues, such as low demand or excess capacity, expansionary macroeconomic policies (like lowering interest rates or increasing government spending) may not lead to traditional goods inflation. Instead, because these policies make borrowing cheaper without necessarily increasing demand for goods and services, they can lead to asset price inflation. This is because investors and consumers might prefer to invest in assets like real estate or stocks, driving their prices up, rather than spending on goods and services.

Question 2

According to the structural stagnation hypothesis, what is the long-run cause of the recent problems facing the United States?

Accepted Answer

The structural stagnation hypothesis suggests that globalization has led to a shift in economic dynamics, causing long-term stagnation in developed countries like the United States due to increased competition and outsourcing.

Question 3

The U.S. economy is currently experiencing a standard business cycle.

Accepted Answer

The U.S. economy's status in the business cycle can vary, and as of October 2023, it may not align with the typical phases of expansion, peak, contraction, and trough. Economic conditions are influenced by various factors, including policy changes, global events, and market dynamics.

Question 4

Solutions to structural stagnation require difficult supply-side structural changes to accompany any demand-side stimulus if they are to be successful in reducing unemployment significantly.

Accepted Answer

Structural stagnation, characterized by prolonged periods of slow economic growth and high unemployment, often stems from deep-rooted issues within an economy's supply side, such as labor market rigidities, inefficiencies in industries, or inadequate infrastructure. Addressing these issues requires implementing supply-side structural reforms, such as improving labor market flexibility, enhancing productivity through innovation, and investing in infrastructure. These reforms complement demand-side stimulus measures by enhancing the economy's capacity to grow and create jobs, thereby making efforts to reduce unemployment more effective.

Question 5

The government can deal with the effects of the decline in wealth, without causing new problems down the road.

Accepted Answer

Government interventions to counteract a decline in wealth, such as increasing spending or cutting taxes, can lead to higher debt levels, inflation, and potentially create economic distortions that cause new problems in the future.

Question 6

What is the difference between the structural stagnation hypothesis and the secular stagnation theory?

Accepted Answer

Structural stagnation hypothesis attributes economic stagnation to globalization and its impacts, such as offshoring and international competition, while secular stagnation theory focuses on the chronic deficiency of investment relative to savings, leading to persistently low interest rates and sluggish economic growth.

Question 7

A trade surplus results when the world supply curve is below the domestic economy's price level.

Accepted Answer

A trade surplus occurs when a country exports more than it imports, not necessarily related to the position of the world supply curve relative to the domestic economy's price level.

Question 8

The central difference between the standard theory and the structural stagnation hypothesis, when it comes to growth, is:

Accepted Answer

The structural stagnation hypothesis differs from the standard theory primarily in its view on the trend growth rate, suggesting a long-term slowdown in economic growth due to structural factors, unlike the standard theory which might attribute fluctuations to cyclical or temporary factors.

Question 9

If an economy has a trade deficit, shifting the domestic SAS curve down will shift the globally-constrained potential output to the right.

Accepted Answer

The answer of If an economy has a trade deficit,...

Question 10

Suppose an economy's trend growth rate is 3 percent and current output is $10 trillion. If the economy enters a recession where output declines by 5 percent in one year, by how much does output have to rise to return to its trend? Assume it takes two years for the economy to return to its trend.

Accepted Answer

The economy's trend growth rate is 3 percent, so its trend output in two years will be $10 trillion * (1 + 0.03)^2 = $10.609 trillion. To return to its trend, output must rise by $10.609 trillion - $10 trillion = $0.609 trillion.

Question 11

According to the structural stagnation hypothesis, structural stagnation has only short-run causes.

Accepted Answer

The structural stagnation hypothesis suggests that stagnation is due to long-term, structural factors in the economy, not just short-run fluctuations.

Question 12

The United States has done very poorly at the high end of the value-added chain.

Accepted Answer

The United States excels in many high-value industries such as technology, pharmaceuticals, finance, and entertainment, contributing significantly to its economic strength and global competitiveness.

Question 13

The globalized AS/AD model takes trade into account, while the standard AD/AS model does not.

Accepted Answer

The globalized Aggregate Supply/Aggregate Demand (AS/AD) model incorporates international trade and its effects on domestic economies, unlike the standard AS/AD model which primarily focuses on the domestic economy without considering the impact of trade.

Question 14

When the financial crisis occurred, policy makers were more concerned about the deficit than they were about addressing the financial crisis.

Accepted Answer

During the financial crisis, policymakers were primarily focused on addressing the immediate financial crisis through various measures such as bailouts and stimulus packages, rather than being primarily concerned about the deficit.

Question 15

According to structural stagnationists, expansionary monetary and fiscal policy has allowed the economy to address its structural problems and adjust in an expedient manner.

Accepted Answer

Structural stagnationists argue that expansionary monetary and fiscal policy cannot effectively address the underlying structural problems in the economy, such as mismatches in labor skills or technological changes, and may only provide temporary relief without solving the root causes of economic stagnation.

Question 16

To remain on its growth trend, an economy must grow more in an expansion than it fell during a recession.

Accepted Answer

For an economy to maintain a growth trend over time, the gains during periods of expansion must outweigh the losses experienced during recessions, ensuring a net positive growth trajectory.

Question 17

The economy recovered quickly from the 2007 recession and returned to its trend growth path.

Accepted Answer

The economy took several years to recover from the 2007 recession, with significant long-term impacts on employment, output, and growth rates, not returning to its pre-recession trend growth path quickly.

Question 18

The housing market boom raised people's perceived wealth.

Accepted Answer

The housing market boom increased the value of homes, making homeowners feel wealthier as the equity in their homes grew. This perceived increase in wealth can influence spending and investment behaviors.

Question 19

The higher the reservation wage, the more likely one is to be unemployed.

Accepted Answer

A higher reservation wage, which is the lowest wage a worker is willing to accept for a given type of job, can lead to longer periods of job search and thus a higher likelihood of being unemployed, as the individual may reject job offers that do not meet their wage expectations.

Question 20

Structural problems associated with globalization are no longer a concern for policy makers or economists.

Accepted Answer

Structural problems associated with globalization, such as income inequality, environmental degradation, and job displacement, continue to be significant concerns for policymakers and economists worldwide.

Quiz 37: Structural Stagnation and Globalization