Answer to Question #149239 in Economics of Enterprise for Wenjing

Question

AS-shocks and AD-shocks played roles in producing the recession. What were their causes? What effect did each type of shock have on real GDP and unemployment? Why did they have these effects?

Answer 1

A financial crisis.

If banks have a shortage of liquidity, they reduce lending and this reduces investment.

A rise in interest rates

Increases the cost of borrowing and reduces demand.

Fall in asset prices

Negative wealth effect leads to less spending.

Fall in real wages

Inflation outstripping nominal wage increases.

Fall in consumer/business confidence also exacerbated by the negative multiplier effect.