Economics 10b Lecture Notes - Lecture 4: Mattress, Ap United States History, Financial System
21 Mar 2016
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When price of stock falls, people sell, driving price further down (goes against the idea of supply and demand: asset price decline hit bank capital. Banks lend less, people pay less for assets. Vicious cycle: financial strains exacerbate economic problems. Financial system starts to work less well. Can"t pay back your car loans, harder for store to pay its lease to the shopping center when there are fewer customers. Vicious cycle again: keynesian multiplier effects. When spending goes down, employment goes down, meaning lower income, meaning lower spending again, another vicious cycle. No, deflation is bad for borrowers: deflationary spiral. Previous bullet point was an explanation of the deflationary spiral, i think: fear raises borrowing costs. You might think some people running to banks know something you don"t. If people think the bank will fail, it"s likely that the bank ends up failing. Balance between efficient spending (which requires quite a bit of thought and need for spending quickly)
