Answer to Question #53080 in Economics for candy

Question

1. Briefly characterize the classical orientation of The Structural Stagnation Thesis (from Martin Wolf, Chapters 5, 6 or the Structural Stagnation Policy Dilemma chapter 28—R1 referenced in Final Exam Study Folder). Use Aggregate Supply and Aggregate Demand (AS/AD) analysis to show how this school portrays globalization as an economic force that limits the potential GDP and makes fiscal policy less effective during recessions

Answer 1

Stagnation thesis states that, as an economy matures, the variety of opportunities for productive investment will diminish, which may cause the fall in economy’s rate of growth.
Monetarists argue that government borrowing as a part of the fiscal policy merely shifts resources from private sector to public sector and doesn’t increase overall economic activity. They argue the increase in government borrowing will increase interest rates and crowds out private sector investment. The good example is the experience of Japan in the 1990s where a liquidity trap was not solved by government borrowing and a ballooning public sector debt.