Friday, January 3, 2020

Macroeconomics Project - 6761 Words

MBA 6410 Project Part 1 The Financial Accelerator and the Flight to Quality One puzzle that has long plagued business cycle analysis is the existence of large fluctuations in aggregate economic activity that arise from what seem to be small shocks. This anomaly is what motivated the research into the financial accelerator. The financial accelerator is a possible explanation for these disproportional fluctuations. Changes in the credit market amplify and spread the initial shocks. This is explanation fits particularly well when firms and households are overextended or highly leveraged. This credit-market amplification of economic shocks is the result of reduced access to borrowed funds. Using the principal-agent approach to credit†¦show more content†¦The flight to quality also affects the real economy. Investment is very sensitive to cash flow for firms that are most likely to be credit constrained. Studies have also shown that, for firms subject to credit-market constraints, employment, RD spending, and inventory investment are affected by an economic downturn. The primary principle of the financial accelerator suggests two main ideas. First, borrowers facing relatively high agency costs in credit markets will bear the brunt of economic downturns (flight to quality). And second, reduced spending, production, and investment by borrowers with high agency costs will worsen the effects of recessionary shocks. The Financial Accelerator in a Quantitative Business Cycle Framework Economic authors as far back as Fisher and Keynes have posited that credit-market conditions play a central role in the transmission of cyclical economic fluctuations. According to this theory, deteriorating credit-market conditions – marked by increases in insolvency and bankruptcy, rising debt burdens, falling asset prices, and bank failures – are not merely a reflection of the real economy. They are, in and of themselves, major factors contributing to the depression of an economy. By adding credit-market conditions to the standard economic models, the ability of these models to explain fluctuations is strengthened. Based on the data, friction in theShow MoreRelatedProject Paper Macroeconomics1161 Words   |  5 PagesProject Paper 1. What is the gross domestic product? Gross Domestic Product, or GDP, is the total market value of final goods and services produced within an economy in a given year. It is the most common measure of an economy’s total output. 2. When prices change, how do we measure real income? When prices change we measure real income with 3. What is unemployment? Why can’t it be driven down to zero? Unemployment is when you don’t have a job. Unemployed people are those who don’t have aRead MoreThe Great Recession : Macroeconomics Project1096 Words   |  5 PagesTHE GREAT RECESSION MACROECONOMICS PROJECT Max: Hi I’m Max Lessins. 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