The dependence of the supply of intermediation on the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: M) diagram, but they are easily understood when one diagram, realizes how changes in the supply of intermediation schedule should be expected to shift the IS curve. The dependence of the supply of intermediation on the capital of intermediaries diaries also introduces an important channel through which additional types of disturbances can affect aggregate activity. Any disturbance that impairs the capital of the banking sector will shift the schedule XS up and to the left, with the effects just discussed. This means that shocks that might seem of only modest significance for the aggregate economy—in terms, say, of the total value of business losses that directly result from the shock—can have substantial aggregate effects if the losses in question happen to be concentrated in highly leveraged intermediaries, who suffer significant reductions in their capital as a result. This was an important reason for the dramatic aggregate effects in 2008–2009 of the losses in the U.S. subprime mortgage mortgage market. The The supply of intermediation can also shift as a result of factors other than a change in the capital of intermediaries; in particular, leverage constraints can tighten or loosen, as a result of changes in the attitudes of intermediaries...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online