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ECN 440 (2)


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Ryerson University
ECN 440
Teresa Fung

1/14/2013 7:16:00 AM ECN440 - BOOMS, BUSTS, PANIS AND MANIAS Week 1 – January 14 Growth and Business Cycles Fluctuations is the pace of expansions of real production is called the business cycle Recession : Unemplyment Expansion : Inflation Market Bubbles A cycle characterized by rapid expansion followed by a rapid contraction Stock market bubble: a surge in equity prices, often more than warranted by he fundamentals, followed by a drastic drop in prices as a massive sell-off occurs Shortage: D > S : Price increases Surplus: D < S :Price decreases Assets: Real (property, gold, oil) and Financial (stocks, bonds) The expansion of bubbles is usually fuelled by the expansion of credit, driven by excessive optimism (animal spirit/herd behavior) A bubble involves a non-sustainable pattern of price changes Manias Bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of investment but n anticipation that theasset or security can be sold to someone else at an even greater price (greater fool) Return = income flows + capital gain/loss Mania describes the frenzied pattern of purchases, often an increase in both prices and trading volumes Bubble: increases in (asset) prices in the mania phase of the cycle Virtually every mania is associated with a robust economic expansion Economic Expansion: Investors become increasingly optimistic and more eager to pursue profit opportunities Lenders become less risk-averse Rational exuberance morphs into irrational exuberance Euphoria develops  more investment and consumption Speculation intensify: increasingly large share of the purchases of these assets undertaken in anticipation of short-term capital gains Asset-Price Bubbles: Credit Driven Credit boom drives up asset prices Rise in asset values in turn encourage further lenders Particularly Dangerous when bubbles burst, asset prices collapse, loans go sour, lenders cut back on credit supply 1/14/2013 7:16:00 AM Week 2 – January 21 Financial Crisis Types of Financial Crisis  Banking Crisis: o when some or all of the banks are threatned with insolvency (assets
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