Lecture 23 Slides Long

With so many dollars pursuing the same assets values

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Unformatted text preview: e zero lower bound, a lejward shij of the IS curve reduces output, and convenEonal monetary policy and inflaEon adjustment cannot undo it. The Short ­Run Effects of a Rise in Inequality If Monetary Policy Is at the Zero Lower Bound r MP0 0 – πe0 Y1 Y0 IS1 IS0 Y Idea #2 The wealthy make riskier investments. As a result, rising inequality raises the demand for risky assets, and so leads to bubbles. “[R]icher Americans used their soaring incomes and access to credit to speculate in a limited range of assets. With so many dollars pursuing the same assets, values exploded.” (Reich, p. 23) What Evidence Does Reich Provide for His Idea? •  Inequality rose in the 1920s, the 1990s, and the 2000s, and there were bubbles in these periods. What Other Evidence Could You Get about Reich’s Idea? •  What does the evidence from other periods show? •  Do the wealthy hold riskier assets? •  Were previous bubbles fueled mainly by demand from the wealthy? •  Was the housing bubble smaller in countries where inequality was risin...
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This note was uploaded on 02/10/2014 for the course ECON 134 taught by Professor Davidromer during the Fall '12 term at Berkeley.

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