Summary the automatic adjustment mechanism when y

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SUMMARY The automatic adjustment mechanism when Y ≠ YBAR. -a shock to the economy occurs and AD or SRAS shift. Is there a surplus or a shortage? Impact on price level? How to firms respond? From SR to LR equilibrium (LRAS=SRAS=AD) Revision of expectations for the price level which results in the adjustment in output prices and wages. SRAS brings economy back to LR equilibrium.
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SR always brings you back to Y BAR Alternative to waiting for the automatic mechanism to end recession is monetary policy (federal reserve: ∆interest rates) or fiscal policy (congress and the president: ∆T, ∆G)\ 19. The Financial crisis and Great Recession: -- Relation between interest rates and rising home prices prior to crisis low interest rates resulted in an increase in spending on housing (and demand for mortgages). the excess demand for housing led to an increase in home prices. Some consumers bought houses to “flip” them (buy low, sell high). Housing bubble- investors expected home prices to rise to they purchased homes not to live in them but to resell them at a higher price (flip). -- Define equity in house equity = (current $P house) – (what is owed in mortgage) -- A mortgage under water when your equity is negative. Current $P house falls and it is less than the mortgage. -- The Crisis of Credit Video: CDOs : collectivized debt obligation: packaged assets together into a security or bond that could then be sold to investors. subprime mortgages : were granted by banks to “subprime” borrowers with poor credit histories (ratings)
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Christopher Reinemann
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