“The bursting of the housing bubble and the Panic of 2008 caused both businesses and households to cut back on their spending in two ways. First, the financial market disruptions made it difficult for businesses to borrow funds for investment spending and for consumers to borrow funds for purchasing housing and motor vehicles. Second, the financial crisis increased the level of uncertainty about the future, which led to a reduction in autonomous spending, or spending independent of output.” Source: Robert H. Frank, Ben S. Bernanke, Louis D. Johnston, and Nilss Olekalns, (2010) Economy update 2010, Sydney: McGraw-Hill.
Explain how each change mentioned in the article impacts upon the aggregate expenditure model and then explain how such changes result in a new equilibrium in that model. Your answer should encompass discussion of changes to the level of inventories.
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