Chapter 06 - Economic Growth, Business Cycles, and Structural Stagnation
ECONOMIC GROWTH, BUSINESS CYCLES, AND
STRUCTURAL STAGNATION
NAME: _______________________________________ DATE: ____ / ____ / ____
Give the best answer to each of the following questions.
1. Draw a typical business cycle on the axes below. Label the four phases. Be sure to include a
growth trend around which output cycles.
2. For each item below, identify whether it is most correctly related to the Keynesian view, the
Classical view, both, or neither.
a. The view that the government should use policy to address problems in the economy
b. The General Theory of Employment, Interest and Money
c. The view that the Depression had been caused by an oversupply of goods in the market
d. The view that business cycles represent temporary glitches
e. The idea that the Depression would have ended sooner if wages had been allowed to fall
f.
The belief that changes in GDP and unemployment are cyclical, that business cycles exist
3. Draw a line from each of the two views of macroeconomics located to the left below to the
time horizon in the middle below that each focuses on. Then, draw a line from each of the
frameworks in the middle below to the side of the economy on the right below that matters
the most in that framework.
Classical
Short-run
Supply side
Keynesian
Long-run
Demand side
Chapter 06 - Economic Growth, Business Cycles, and Structural Stagnation
4. Suppose that output in a certain country is $4,000 billion, and that the country has a
population of 100 million people.
a. What is per capita output in this country?
b. Suppose that the country’s output grows by 2.5 percent in a given year while the
population grows by 1 percent. After these changes, what is the per capita output in this
country?
c. What was the growth rate (percentage change) in per capita output?
5. Give the definitions of frictional unemployment, structural unemployment, and cyclical
unemployment. Which of these are the government’s problem, and which are the individual’s
problem?
6. How does the definition of the current unemployment problem as cyclical or structural—as
well as the appropriate policy response to the current unemployment problem—relate to the
way one interprets current economic conditions?
7. Determine whether the statements below are true or false. If they are false, rewrite them to
make them true statements.
a. In a structural stagnation, most of the unemployed can eventually get new jobs without
having to learn new skills or accept lower wages.
b. In a structural stagnation, unemployment is due primarily to temporary layoffs.
c. A depression is a deep and prolonged recession.
d. If the economy does not return to its long-term growth rate within four years, it is most
likely in the midst of a conventional business cycle recession.
Chapter 06 - Economic Growth, Business Cycles, and Structural Stagnation
Answers to the Problem Set
The following are the correct answers to the problem set that follows on the next two
pages, along with the learning objective associated with each question. The problem set
is designed to be photocopied directly from this book and distributed for student use.
wn
tu
tu
r
do
up
peak
n
1. (LO3)
The correct figure should look like the one below.
rn
trough
2. (LO1)
a. Keynesian; b. Keynesian; c. Neither; d. Classical; e. Classical; f. Both
3. (LO1)
Students should connect “Classical, Long-run, Supply side” and “Keynesian,
Short-run, Demand side.”
4. (LO2)
a. $40,000; b. $40,594; c. About 1.49 percent
5. (LO4)
Frictional unemployment is unemployment caused by people entering the job
market and people quitting a job just long enough to look for and find another
one. Structural unemployment is unemployment caused by the institutional
structure of an economy or by economic restructuring making some skills
obsolete. Cyclical unemployment is unemployment resulting from fluctuations in
economic activity. Cyclical unemployment and unnecessary structural
unemployment is the government's problem; frictional unemployment and
necessary structural unemployment is the individual's problem.
6. (LO3)
Whether one interprets the current unemployment problem in the United States as
cyclical or structural depends on whether one believes the economy is in a
structural stagnation or a conventional business cycle. If it is a structural
stagnation, the current unemployment problem is structural and will require
structural changes to solve. If the economy is in a conventional business cycle, the
current unemployment problem is primarily cyclical and will disappear as the
economy comes out of the recession.
7. (LO3)
Chapter 06 - Economic Growth, Business Cycles, and Structural Stagnation
a. False. "In a structural stagnation, most of the unemployed can eventually get new
jobs only if they learn new skills or accept lower wages."
b. False. "In a structural stagnation, unemployment is not due primarily to temporary
layoffs; it is due to longer term changes."
c. True.
d. False. "If the economy does not return to its long-term growth rate within four years,
it is most likely in the midst of a structural stagnation."