TAILIEUCHUNG - Lecture Economics (9/e): Chapter 28 - David C. Colander

Chapter 28 - The structural stagnation policy dilemma. After reading this chapter, you should be able to: Differentiate a structural stagnation from a standard recession, demonstrate in the AS/AD model how globalization can mask inflationary pressures caused by expansionary policies, explain the role of globalization and the financial bubble in creating a structural stagnation problem, outline the policy choices that policy makers have to deal with structural stagnation. | Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint why they sometimes collide with a bit of reality against which they are dashed to pieces. — Sigmund Freud The Structural Stagnation Policy Dilemma Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Differentiate a structural stagnation from a standard recession Demonstrate in the AS/AD model how globalization can mask inflationary pressures caused by expansionary policies Explain the role of globalization and the financial bubble in creating a structural stagnation problem Outline the policy choices that policy makers have to deal with structural stagnation 2 The Structural Stagnation Hypothesis In December 2007 the . economy fell into a prolonged period of slow growth and stagnation that was not a normal recession The structural stagnation hypothesis sees the recent problem of the . economy directly related to the structural problems caused by globalization 3 Why the Assumed Underlying Growth Trend Is Important for Policy The biggest change that the structural stagnation hypothesis makes to standard macro theory involves the economy’s assumed growth rate in a recovery The standard macro policy assumption is that an economy will quickly get back to its long-run trend growth rate Structural stagnation assumes that the adjustment will take much longer, perhaps decades Structural stagnation explains the decreased effectiveness of expansionary monetary and fiscal policies 4 The AS/AD Model with Globalization The globalized AS/AD model adds a world supply curve to the standard AS/AD model to capture the effect that globalization issues can have on an economy Net exports are not part of the standard AS/AD model The world supply curve is the amount of tradable goods other countries will supply to the country at a given price level and exchange rate If domestic .

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