EC250 Chapter Notes - Chapter 1: Fiscal Policy, Moral Hazard, Mae
Document Summary
Growth has slowed down around the world. Interest rates are at record lows, indicating a shortage of promising opportunities and continued uncertainty. Monetary policy will be limited since interest rates are close to zero. Great recession started around 1am on september 15, 2008, when lehman brothers went into liquidation, bankrupt. Expectation was that the government would bail them out: government had bailed out bear sterns, fannie mac and freddie mae before. If a bank knows it will be saved by the fed when needed, it will engage in excessively risky activities. Liquidity crisis is a situation in which liabilities are liquid and must be repaid now, while assets are illiquid and cannot be sold quickly. Two days later, aig was bailed out. Recession is usually defined as two consecutive quarters of falling output. To fight the recession both monetary and fiscal policies were employed.
