ECON 101 Lecture Notes - Lecture 11: Marginal Product, Quantitative Easing
Economics 101
Lori Leachman
Part 11 • Lecture
• Recessionary Cases:
o Keynesian - AD oriented
▪ Decrease in AD leads to lower price levels, lower income
▪ Unemployment rises - use fiscal policy to remedy
▪ Increase government spending to increase AD
o Classical - AS oriented
▪ Decrease in AS leads to higher price levels, lower income
▪ Unemployment rises (but is voluntary) - no need to do anything
• Deflation
o Good deflation - due to increased productivity
▪ Increase in AS causes price level (PL) to decrease
• Increase income (Y) to handle burden of debt
▪ Increase in Dlabor causes marginal product of labor (MPL) to increase
• Allows for increased wage or hire more workers (or both)
o Bad deflation - due to collapse in spending (decreased G)
▪ Decrease in AD causes price level (PL) to decrease
• Decrease in income (Y) making burden of debt worse
▪ Decrease in Dlabor causes marginal product of labor (MPL) to decrease
• Forces firms to fire workers or pay them less (or both)
• Bad deflation example: Depression & Financial Crisis of 2007
o Depression started with stock crash; 2007 crisis started with housing bubble bursts
▪ Decline in wealth and expectations worsen
• Decline in consumption spending (C) and investment (I) cause decline in TS and
AD
o Price level falls and income falls, unemployment rises - leads to more
decline in consumption and investment (worse expectations) - multiple
shifts in AD downward - leads to downward spiral
o Halt process using stimulus
▪ WPA, Public Works Project during Depression and public stimulus package in 2007
▪ Expansionary fiscal policy (increase in government spending)
▪ During Depression, used tight monetary policy (mistake) - made depression worse
▪ During 2007, also added expansionary monetary policy on top of fiscal
• Quantitative Easing 1, 2, 3
o Doing more than buying bonds, but also buying bad assets
▪ Giving banks cash and taking bad assets off banks - liberate
banks to resume lending
▪ Increases AD to rebuild economy
o Tranche - mortgages
▪ Top tranche - best mortgages - low yield
▪ Bottom tranche - poor mortgages - high risk but high yield
• Led banks into crisis
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