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# Macroeconomics Study Set 45

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## Quiz 21 : Structural Stagnation and Globalization

Explain graphically and with words the effect of expansionary fiscal policy in the globalized AS/AD model.
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In the graph shown, the quantity of aggregate demand at PW is Y0.Domestic producers supply Y1, creating a trade deficit of Y0- Y1.Expansionary fiscal policy shifts the AD curve out to the right to AD1.Aggregate quantity demanded rises to Y2 and the trade deficit rises to Y2- Y1.

What is meant by import-led stagnation?
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An import-led stagnation is slow growth caused by the structural problems accompanying globalization.According to the structural stagnation hypothesis, the U.S.trade deficit has a significant impact on employment-at $30,000 a job, a$550 billion trade deficit translates into more than 2 million fewer jobs for the United States than if there was no trade deficit and everything else was identical.Simply put, the trade deficit translates into higher unemployment and lower potential output until these displaced workers find new jobs in different fields that are competitive in the globalized economy.

Explain how globalization can limit a country's potential output.
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A world price for goods below the U.S.price of goods enables U.S.consumers to consume more than they had previously.But it also makes it harder for U.S.producers to sell their goods, which means that, due to structural reasons, international competitive forces put a limit on domestic potential output.If potential output were determined only by the physical existence of workers and factories, potential output would not have fallen.But according to the structural stagnation hypothesis, potential output depends on more than physical productive capacity; it depends on the wages, technology, and global competitive conditions, and when trade deficits are possible, globalization can reduce the amount a high-wage developed country can competitively produce.

What would tariffs do to unemployment caused by globalization? Why do most economists not favor using tariffs?
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What does a fall in the exchange rate do to a country's potential output and long run aggregate supply?
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How does the world supply curve change if a country's inflation is lower than the world's inflation?
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Explain the role that globalization and technological change play in the structural stagnation hypothesis.
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Why does fiscal policy in the globalized AS/AD model have a different effect than fiscal policy in the standard AS/AD model?
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Why is it often empirically difficult to differentiate a structural stagnation from a standard recession?
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As India and China move up the value added chain, how will the effect of globalization likely change on US workers?
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How does the existence of a nontradable sector change the implications of the globalized AS/AD model?
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What adjustment forces would one have expected to resolve structural stagnation in the globalized AS/AD model? Why didn't they occur in the recent U.S.case?
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What do almost all the "solutions" to the structural stagnation problem have in common?
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According to the text, how does structural stagnation differ from secular stagnation?
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Why are deficits of less concern when used to fight a standard recession than when they are used to fight structural stagnation?
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State the structural stagnation hypothesis
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