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ooAt p=100, there is a surplusoFirms lower production because cost of production falls The impact of the internet on the US oLR: Does output at potential (ybar) change? Ybar increases to Ybar2Each worker is more productive oSR: Does output change? The Price level? Yes. SRAS shifts rightward and price level falls Increased productivity lowers costs so firms can lower output prices oDoes Ubar (the level of U at full employment) change? No, remains unchanged Conclusions: Impact of the internet oThe adoption of the internet resulted in an increase in productivity which lowers costs of output/hour oResult: Price level decreases, Ybar increases (potential), but Ubar remains unchanged. oThe impact of the Internet on the US economy is permanent (temp or permanent?) The Financial Crisis and the Great Recession oThe financial Crisis The link between: homeowners wall street investors
oTurning point: When homeowners started defaulting on mortgages Investors would not buy CDO’s from Investment Bankes Lenders could not sell mortgages to Wall Street “Everyone was going bankrupt” oThe great recession o
Conclusions Chapter 13 part 5: The financial crisis and great recession The Housing Bubble: Prior to financial crisis and Great recession oLow interest rates resulted in an increase in spending on housingThe excess demand for housing led to an increase in home pricesSome consumers bought houses to “flip” them (buy low sell high)oThe housing bubble started to “deflate” in 2006 The financial crisis oWith the collapse of the housing market: Some homeowners defaulted on their mortgages Foreclosures – banks tried to sell but more and more of these houses up for sale But there were no buyers Wall street could not sell mortgage – backed securities (bonds) to investors (CDOs) Banks (lenders) could no longer sell mortgages to wall street Banks themselves were close to defaultingMajor impact of the financial crisis on the US economy oCredit Crunch: Banks hesitant to lend (supply of loanable funds shifts left) (increase in r) oDodd- Frank Act 2010: Households and businesses have difficulty obtaining loans due to an increase in bank regulation (decline in C and I) oDecline in household wealth (decline in C): Real Estate wealth: $7 trillion decline Stock Market Wealth: $7 trillion decline
ooThe Great recessionoCollapse of housing market, _____, rise in ______ (“a perfect storm”)
Chapter 13 part 6: Conclusions AD/SRAS/LRAS model oWithout policy intervention, the economy would eventually return to Y=Ybar; LR equilibrium = AR=SRAS=LRAS oIn the SR: firms adjust to a surplus or shortage and the economy moves toward SR equilibrium: AD = SRAS oSR to LR: Firms and workers adjust their expectations for the change in price level Result: SRAS will shift until AD = SRAS = LRAS oWe do not know how long it will take for prices and wages to adjustThis imposes economic pain during recession:U > Ubar (unemployment at full employment)and during inflationary boom (AD > LRAS):high inflation oIn general, goods prices are very slow to adjust; asset prices (e.g., bond