This is following the automatic mechanism • the government also could use monetary and fiscal policy to shift AD curve to restore potential • GDP more quickly supply shock Suppose oil prices increase causing SRAS to shift to the left. Price level is higher and real GDP is • lower which is a combination of inflation and recession called stagflation . Output falls as prices rise. There is a shortage here The recession caused by a supply shock increases unemployment and reduces output. Workers • accept lower wages and firms accept lower prices. THE SRAS shifts back to the right. The price level doesn't drop an alternative would be using monetary and fiscal policy to shift the aggregate demand curve to • the right but that would result in a higher price level the alternative is always monetary policy (change interest rate) and fiscal policy (change tax and • government purchases) does it matter what causes a decline in aggregate demand? most recessions have begun with a decline in residential construction • "housing is the business cycle" • higher interest rates reduce consumer demand for new houses by increasing the cost of loans • in the 2009 recession they were too optimistic about returning to normalcy • Equity on a house = current market value minus the remaining mortgage payment. It can really • depend on if the house is appreciating or depreciating Mortgage under water is when a loan has a higher balance then free market value, you can't sell •
unless your prepared to make up the loss out of pocket the housing bubble this took place prior to the financial crisis and great recession • low interest rates resulted in an increase in spending on houses and demand or mortgages • speculators buy the homes for low prices and sell them for a high price. also called flipping • the excess demand for housing led to an increase in home prices • the housing bubble is investors expecting house prices to rise so they purchase homes not to • live in but just resell them at a higher price crisis of credit video the financial crisis (2007-2008) • began in 2007 from expanision that started in 2001 . Construction increased rapidly from • 2002-2005 and ended up decling 60% from 2005 to 2010. everyone is getting richer because homeowners are becoming wealthier as home prices rise • homeowners are making mortgage payments to investment banks. Subprime mortgages are • mortagages given to people with poor credit wall street who are the invest banks bundle mortgages into CDO's and sell them to investors • investors get high returns on CDO's (packaged assets into bonds and securities at are sold to • investors) suddenly the bubble BURSTS ( begins defaulting in 2006 ) and prices begin to fall • with the falling prices homeowners being to default on their loans (MAJOR turning point. ) The • investment banks su ff er heavy losses, instead of receiving mortgage payments they are receiving these worthless homes aka: foreclosed
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