ECO 304L Study Guide - Midterm Guide: Potential Output, Capital Accumulation, Cash Flow
20 Oct 2017
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Document Summary
Supply-side explanations for growth currently dominate the economics profession. One critique of this view is based on the weakness of the mechanism through which the economy will return to its potential level of output (y*). The assumption that output returns to y* in a reasonably short period of time is supported to some extent by the evidence of the u. s. economy prior to 2000. In the postwar period, recessions were shallow and short. The 1974-75 recession was deep, but recovery was quick. Following the 1981-82 recession, it took four to five years for a return to potential output. The same was true in the aftermath of the. But the evidence following the 2001 recession has been less favorable. Theoretically, by late 2004, we should have reached y* after the weak period beginning with the 2001 recession. But u. s. economic performance was mediocre from 2002 to 2004 despite the most aggressive keynesian monetary and fiscal stimulus since world war 2.
