o o At p100 there is a surplus o Firms lower production because cost of

O o at p100 there is a surplus o firms lower

This preview shows page 15 - 22 out of 33 pages.

o o At p=100, there is a surplus o Firms lower production because cost of production falls The impact of the internet on the US o LR: Does output at potential (ybar) change? Ybar increases to Ybar2 Each worker is more productive o SR: Does output change? The Price level? Yes. SRAS shifts rightward and price level falls Increased productivity lowers costs so firms can lower output prices o Does Ubar (the level of U at full employment) change? No, remains unchanged Conclusions: Impact of the internet o The adoption of the internet resulted in an increase in productivity which lowers costs of output/hour o Result: Price level decreases, Ybar increases (potential), but Ubar remains unchanged. o The impact of the Internet on the US economy is permanent (temp or permanent?) The Financial Crisis and the Great Recession o The financial Crisis The link between: homeowners wall street investors
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o Turning 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” o The great recession o
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o o o
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Conclusions Chapter 13 part 5: The financial crisis and great recession The Housing Bubble: Prior to financial crisis and Great recession o Low interest rates resulted in an increase in spending on housing The excess demand for housing led to an increase in home prices Some consumers bought houses to “flip” them (buy low sell high) o The housing bubble started to “deflate” in 2006 The financial crisis o With 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 defaulting Major impact of the financial crisis on the US economy o Credit Crunch: Banks hesitant to lend (supply of loanable funds shifts left) (increase in r) o Dodd- Frank Act 2010: Households and businesses have difficulty obtaining loans due to an increase in bank regulation (decline in C and I) o Decline in household wealth (decline in C): Real Estate wealth: $7 trillion decline Stock Market Wealth: $7 trillion decline
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o o The Great recession o Collapse of housing market, _____, rise in ______ (“a perfect storm”)
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o o o
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Chapter 13 part 6: Conclusions AD/SRAS/LRAS model o Without policy intervention, the economy would eventually return to Y=Ybar; LR equilibrium = AR=SRAS=LRAS o In the SR: firms adjust to a surplus or shortage and the economy moves toward SR equilibrium: AD = SRAS o SR to LR: Firms and workers adjust their expectations for the change in price level Result: SRAS will shift until AD = SRAS = LRAS o We do not know how long it will take for prices and wages to adjust This imposes economic pain during recession: U > Ubar (unemployment at full employment) and during inflationary boom (AD > LRAS): high inflation o In general, goods prices are very slow to adjust; asset prices (e.g., bond
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