ECO 304L Chapter Notes - Chapter Unit 3: Ch 9-12, 16: Potential Output, Human Capital
7 Oct 2017
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When the price of energy rose, the cost of operating existing capital increases as well. Some of the machines were too expensive to use in this new situation, effectively reducing the physical capital input. The result is lower y*: over time, this effect probably dissipated over time. Even if energy prices remain high, new investments can incorporate more energy-efficient technology. This is more of a challenge, but some economists have tried to do so: most explanations begin with the housing market. Default rates rose and the mortgage market collapsed with a collapse in residential construction following soon after: the graph above shows the boom and bust of real residential construction. The decline was dramatic: in a pure supply-side model, this decline would simply result in labor and capital resources moving from the housing sector to some other part of the economy, with no obvious effect on.
