ch15 Financial Crises, Stabilization, and Deficits.pptVIP

Prepared by: Fernando Quijano Shelly Tefft;;stock A certificate that certifies ownership of a certain portion of a firm.;The Stock Market, the Housing Market, and Financial Crises;Dow Jones Industrial Average An index based on the stock prices of 30 actively traded large companies. The oldest and most widely followed index of stock market performance.;? FIGURE 15.1 The SP 500 Stock Price Index, 1948 I–2010 I;? FIGURE 15.2 Ratio of After-Tax Profits to GDP, 1948 I–2010 I;The huge increase in U.S. stock prices in the last half of the 1990s is a puzzle. So also is the huge increase in U.S. housing prices between 2002 and 2006. Many other countries have seen large increases in asset prices since then as well. An interesting question is whether these rapid run-ups in prices are bubbles, generated by irrational consumers and investors, or are instead the result of actions of rational investors that simply turned out with hindsight to be wrong. A key policy question is whether the Fed should ignore asset prices or try to use interest rates to control them.;The Stock Market, the Housing Market, and Financial Crises;An increase in wealth increases consumer spending. Fluctuations in household wealth are due to fluctuations in stock prices and housing prices. With unpredictable wealth change, we end up with unpredictable consumption changes and thus unpredictable changes in GDP.;The Stock Market, the Housing Market, and Financial Crises;E C O N O M I C S I N P R A C T I C E;Path A is less stable—it varies more over time—than path B. Other things being equal, society prefers path B to path A. ;Attempts to stabilize the economy can prove destabilizing because of time lags. An expansionary policy that should have begun to take effect at point A does not actually begin to have an impact until point D, when the economy is already on an upswing. Hence, the policy pushes the economy to points E? and F? (instead of points E and F). Income varies more widely than i