Question

Two economists are debating the cause of a high unemployment rate. One economist argues that there is not enough government spending. The other says high unemployment is a structural problem—people who can’t move to take new jobs because they are tied down to burdensome mortgages or firms that can’t find workers with the skills they need to fill job openings.

1. Which business cycle theory would say that the first economist is correct and why?

2. Which business cycle theory would say that the second economist is correct and why?

Answer 1

SOLUTION:-

* Mainstream business cycle theory states that the GDP grows at the steady rate while aggregate demand grows at a fluctuating rate. Thus, the first economists are correct under mainstream business cycle theory because it says unemployment is caused by too little aggregate demand.

* Real business cycle theory suggests that the fluctuations in business-cycle is mainly due to real shocks. Thus, the second economists are correct undery real business cycle theory because it says unemployment is structural caused by technological shocks that decrease aggregate supply.

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