ECON 20 Lecture Notes - Lecture 9: Stock Market, Nominal Rigidity, Structural Adjustment
Document Summary
Many prices are sticky in the short run. All prices are flexible in the long run. Firms adjust to unexpected, but permanent changes in demand. In the long run, all prices are flexible and price stickiness will moderate, even if a frim must make short adjustments to adapt to shocks, in the long run it does not have to stick with that policy. Severe recessions are often preceded by asset-price bubbles- periods during which euphoria and debt-fueled speculation cause the price of one or more financial assets to irrationally skyrocket before collapsing down to more realistic levels. The austrian explanation: excessively low interest rates. Blame recessions on not euphoria but on government actions that they say keep interest rates too low. Pushing interest rates low while massively increasing government spending. Structural adjustment of economies so that government held back and let inefficient firms go bankrupt to all. National income accounting measures economy"s overall performance.
