Banking and Monetary Policy_Butkiewicz_Date_022310

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Chapter 3 continued 24: stocks- claim on assets into the indefinite future (payments depend on earnings—not constant) 25: “old methods don’t apply”- thought to be true until bubble bursted, market crashed. It is impossible to determine when bubbles will burst 26: Mississippi Bubble and South Sea Bubble are both based on investment in new economy, prices go through the roof then they burst 27: nominal P/E ratios rand from about 10, 15, 20 28: higher the P/E more likely the prices are to be negative 29: “irrational exuberance”- stock prices too high and not justified 31: know it is a bubble if it is followed by a crash 32: 2 Big Crashes- October 28 1929 and October 19 1987- both called “Black Monday” 34: often buy 5-10% margins. Example- bought $1000 worth of stock on 10% margin so borrow $900. Value fell to $800 so cover losses and increase margin, You are asked for a check of $180 for loss and many people could not pay so they sell and everyone says sell which leads to a crash.
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