Question

Please use the following to answer the questions

a. Mainstream View

b. Monetarist View

c. Real Business Cycle Theory

d. self-correction view

33. The significant increase in oil prices during the late 1970s and early 1980s created a reduction in labor productivity that had long-term effects on economic output and the price level, which lasted until the emergence of information and communication technology in the 1990s. 34. In 2000, the Federal Reserve raised interest rates several times. These actions are believed by some to have caused the bursting of the dot-com bubble (a major reduction in the stock values of Internet companies) in the following year. se of fluctuations in aggregate demand and therefore the level of output in the economy is the existence of volatility in investment spending. 36. "In a recession, we should just leave the economy alone. Eventually, prices and wages will sort themselves out, and we'll recover that way." 37. The brief recession in 2001, which lasted only 8 months, exemplifies an economy's ability to return to full employment without stabilizing policies.

Answer 1

Answer 33 :-

1) In 1973 the OPEC oil embargo decided to stop exporting oil to US because US was taken off the gold standard . As a result countries could no longer redeem the US dollars in their foreign exchange reserves.

2) This led to quadrupling of oil prices in next six months .

3) At that time US policies included Nixon wage price control and forced the companies to keep the wages high .

4) This led to lower productivity of workers , laying them off and non hiring of new workers .

Answer 34 :-

1) There were predictions of bubble burst in the late 1990 itself .

2) As a response to Asian crisis mini crash , the federal reserve raised interest rate six times between one year .

3) This lead to burst of stock market bubble in the form of NASDAQ crash.

Answer 35 :-

1) Investment includes capital expenditure like purchasing of machinery , equipments and building .

2) Investment is a component of aggregate demand itself.

3) AD = C+I + G + X - M

4) Thus if the investment increases AD will also increase and vice versa .

5) Thus we can say that investment spending changes creates volatility in aggregate demand

Answer 36 :-

1) The idea of the self correction mechanism is that the shocks only matter in short run .

2) In long run the recession is corrected by lower wages and increase in short run aggregate supply .This leads to shift of supply curve to the right forming a new equilibrium with old demand .

3) It will keep shifting until both long run supply curve and aggregate demand are at full employment thus correcting the imbalance .

Answer 37 :-

1) When the economy hit the recession , the Federal Reserve in order to protect economy , made successive interest rate increases .

2) This lead to the dot com bubble burst followed by recession and unemployment.

3) It took almost a decade for the economy to stabilize .

4) Also more baby boomers took retirement , reducing the number of jobs needed and facilitating economic recovery.