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(a)
Identify the business cycle theory that supports
(a)
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Explanation of Solution
The mainstream theory of business cycle supports the claim that insufficient government spending causes high unemployment in the economy. It is because this theory states that recession causes unemployment. The different forms of mainstream theory such as the Keynesian cycle theory and New Keynesian cycle theory explains that only government spending can eliminate the recessionary gap, thereby reduces the unemployment rate in an economy. Hence, the mainstream theory supports that the first economist is correct.
Business cycle: The term business cycle refers to the repeated ups and downs in the level of economic activity that extend for several years.
(b)
Identify the business cycle theory that supports unemployment as a cause of structural problem.
(b)
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Explanation of Solution
The real business cycle (RBC) theory supports the claim that structural problem causes high unemployment in an economy. This is because RBC states that ‘random fluctuations in the productivity’ is the main source of economic fluctuations. Therefore, the rate of technological change is the impulse that generates business cycle, thereby the structural unemployment in the economy. Hence, the real business cycle theory says that the second economist is correct.
Business cycle: The term business cycle refers to the repeated ups and downs in the level of economic activity that extend for several years.
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Chapter 12 Solutions
Macroeconomics
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