1 Introduction to Macroeconomics
2 Measuring the Macroeconomy
3 An Overview of Long-Run Economic Growth
4 A Model of Production
5 The Solow Growth Model
6 Growth and Ideas
7 The Labor Market, Wages, and Unemployment
8 Inflation
9 An Overview of the Short-Run Model
10 The IS Curve
11 Monetary Policy and the Phillips Curve
12 Stabilization Policy and the AS/AD Framework
13 The Global Financial Crisis: Overview
14 The Global Financial Crisis and the Short-Run Model
15 The Government and the Macroeconomy
16 International Trade
17 Exchange Rates and International Finance
18 Parting Thoughts




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Chapter 13: The Global Financial Crisis: Overview

Chapter Outline

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Key Concepts

  1. The U.S. economy has suffered several major shocks in recent years. Initially these shocks included a large decline in house prices and a spike in the prices of oil and other commodities.

  2. The decline in house prices reduced the value of mortgage-backed securities. Because of leverage, this threatened the solvency of a number of financial institutions, including major investment banks. Risk premiums rose sharply on many kinds of lending, and the stock market lost about half its value.

  3. These shocks have combined to put the U.S. economy and many economies throughout the world into a financial crisis and a deep recession, likely the largest since the Great Depression.

  4. Balance sheets are an accounting device for summarizing the assets, liabilities, and net worth (or equity) of an institution, such as a bank, a household, or a government.

  5. Leverage is the ratio of liabilities to equity. Financial institutions are typically highly leveraged; for example, $10 of assets may be financed by $1 of equity and $9 of debt, a leverage ratio of 9 to 1. Major investment banks before the financial crisis were even more highly leveraged, on the order of 35 to 1.

  6. Leverage magnifies both returns and losses, so that a small percentage change in the value of assets or liabilities can be enough to entirely wipe out equity, causing an institution to become insolvent, or bankrupt.

  7. During the height of the financial crisis, the solvency of numerous financial institutions was called into question. Because financial firms are interlinked through a complex web of loans, insurance contracts, and securities, problems in a few financial institutions can create problems in many others, which is called systemic risk.

13.1 Introduction

13.2 Recent Shocks to the Macroeconomy

  • Housing Prices
  • The Global Saving Glut
  • Subprime Lending and the Rise in Interest Rates
  • The Financial Turmoil of 2007-20?
  • Oil Prices

13.3 Macroeconomic Outcomes

  • A Comparison to Previous Recessions
  • Inflation
  • Case Study: A Comparison to Other Financial Crises
  • The Rest of the World

13.4 Some Fundamentals of Financial Economics

  • Balance Sheets
  • Leverage
  • Bank Runs and Liquidity Crisis
  • Financial Wrap-Up
« Return to Chapter 13 Study Plan