Exam 2 Notes - GDP falls the change in P is unknown GDP...

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Security food chain 1. Homeowner- gets mortgage from bank 2. Lender- sells mortgage to investment bank 3. Investment bank- packages many mortgages into CDO 4. Worldwide investors- buys CDO’s and CDs Regulators during the bubble Small probability of a national housing slump. On expectation activity in MBS market considered safe by investors. 1% chance so you can’t live expecting it but you must keep in mind that it can always happen. Ellie’s Notes: Graph AD Assume there’s an increaser in the employment tax = > costs rise for firms, returns from working fall for workers AS: costs rise for firms, therefore at any level of GDP, costs rise and P must rise (AS shifts up) AD: at any price, workers earn less and therefore send less (AD shifts left by the change in spending time the AE multiplier)
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Unformatted text preview: GDP falls, the change in P is unknown. GDP* probably falls as L* falls (fewer workers hired in equilibrium) Note- Graph would look exactly the same if we had had an increase in oil prices instead of an increase in the L tax. Ellie’s Notes: Grah AD2 Imagine AD goes up- what will happen in the long run in labor markets and good markets> Short run: move along AS as P rises, w/p and firms can hire more workers (L up, GDP up) Long run: Vertical AS in the long run: why? Workers are working more but earning less in real terms. That’s crazy! So they threaten to quit unless they get paid more. Both happen: w/p goes up and firms lay off workers (move along LD curve, shifting AS as costs rise with the rise in w)...
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