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Chapter 5

ECO105Y1 Chapter 5: MACRO

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5.1 Connecting Micro and Macro Economics
- Global Financial Crisis
- Began with rising housing prices from 1996 to 2006
- Banks expected trend to continue and offered no down payment
mortgages, which were sold to investors
- Leading to more money for banks to keep giving mortgages
- When housing settled, the value of mortgages fell and the banks had to sell off
other assets to meet obligations
- The Great Depression
- Stock market burst leading to unemployment and lack of services, all while
population was increasing
- Government Mistakes:
- Britain’s decision to use the gold standard led to their products costing
much more to foreigners and reduced exporting
- Government’s increased tax to compensate for lower tax revenues, which
further harmed the economy
- Macroeconomics : the combined outcomes of all microeconomic choices
- Fallacy of Composition : what is true for one is not true for all
- A smart choice made by one person has a different outcome than many people
making the same choice
- Paradox of Thrift : if everyone reduces spending, it will lead to decreased
- Macroeconomic Connection
- Focuses on interactions in input market alone and output market alone
- Focuses on the connections between the two and how they can break the
- Fundamental Macro Question: If left alone, do markets re-adjust?
- Say’s Law
- Yes, markets supply will create its own demand (Starting from
- Did not appear true in Great Depression
- Keynesian Revolution
- Created Macro
- No, Emphasized the need of intervention by banks, governments, and
- Expectations
- Often mislead market and drive further market damage
5.2 Economics and Politics
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