assign5KEYPOINTS

assign5KEYPOINTS - Intro Macro N Sheflin ASSIGNMENT 5 KEY...

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I n t r o M a c r o N . S h e f l i n ASSIGNMENT 5 - KEY POINTS The textbook combined lots of material in the two chapters covered in assignment 5. I highlight the KEY POINTS that you should take away (the rest is mostly optional, especially the 45 degree line analysis) BUSINESS CYCLES Facts o Peaks, troughs, expansions, contractions, recurring but not predictable, average post WWWII expansion 57 months, contraction 10 months o Often preceded by decline in leading indicators (index of leading economic indicators) and then declines in fixed investment (plant,equipment, residential housing), then aggregate demand and gdp, Increase in inventories, then decline in employment, prices, interest rates, profits, but generally not wages Business Cycle Theories o Exogenous (outside shocks, like energy crisis or housing bubble bursting) and may be propagated by endogenous dynamics (multiplier- accelerator model shows how this can happen) o Old Theories of ‘Waves’ (predictable, recurring patterns – wrong ± Sunspots ,etc The Recent Recession o Housing Bubble bursts ± Caused by low interest rates savings glut (China), principal agent problems, too big to fail-moral hazard, financial engineering, weak regulation, o Led to Financial Sector Distress ± Mortgage backed securities, cdos, cds, tank ± Stock prices fall, lending restricted o Spreads to ‘real’ economy - C and I (Ires) fall ± wealth effect ± animal spirits ± financing difficulties) o D declines, unemployment rises, Saving rate increases (C down)
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assign5KEYPOINTS - Intro Macro N Sheflin ASSIGNMENT 5 KEY...

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