01:220:103 Chapter Notes - Chapter 14: Sunk Costs, Collateral Damage, Aggregate Demand
3 May 2016
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Intertemporal substitutions: uncertainty and irreversible investments, labor adjustment costs. 4. time bunching: collateral damage, examples of a transmission mechanism. Costs of shifting workers from declining sectors of the economy to growing sectors are high. Many investments are irreversible and can"t be easily changed or adjusted when economic conditions change. Bunching across a single course of a single day. Collateral damage: collateral - a valuable asset that is pledged to a lender to secure a loan. If the rm does incredibly well the bank simply gets its loan back plus interest: this behavior ampli es booms and busts. During booms asset values increase banks approve more loans (backed by assets) exacerbates boom. During recession asset values decrease banks reluctant to lend incentive to walk away from debt - exacerbates bust: during a boom, asset prices are increasing and rms have cash ow.
