When the housing price bubble burst, there were some obvious effects on the economy, and some that were not so obvious. Explain these.
What will be an ideal response?
When the housing price bubble burst, obviously prices plunged, and fell more severely in markets that were previously boom markets. The price of an average American home fell by 12–25 percent, depending on how you measure it. Plunging prices made both buying and building new homes far less attractive. For sale signs sprouted up everywhere, inventories of unsold houses piled up, driving prices down further. Contractors stopped building new homes, and residential construction dropped by a remarkable 56 percent between the winter of 2005–2006 and the spring of 2009 when it hit rock bottom.Less obvious, because spending on newly constructed homes is part of investment, GDP growth slowed in late 2005. A great deal of consumer wealth was destroyed in the process, particularly because a house is the single most expensive thing many Americans will ever own. Their wealth reduced, they reduced their consumer spending.Even worse, because houses are purchased mainly with borrowed funds (mortgages), if the buyer fails to pay the mortgage, the bank can repossess the home. And because prices of houses were falling from their previously inflated highs, many houses were worth less than the amount owed on the mortgage. And so banks also lost money.
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Quantity supplied increases when the price of a good increases because
A. producers find it more profitable to make the item. B. potential buyers “drop out” of the market, so the good becomes more abundant. C. as demand decreases with a high price, surpluses appear. D. All of these responses are correct.
In the production possibilities frontier depicted in the figure above, which of the following combinations of hats and bananas is inefficient?
A) 4 million pounds of bananas and 4 million hats B) 2 million pounds of bananas and 5 million hats C) 0 pounds of bananas and 6 million hats D) 1 million pounds of bananas and 3 million hats
The fast-food industry is generally considered to be a constant cost industry in regards to its use of labor as an input. Why? a. Few people prefer to work in the industry
b. Available labor is in short supply. c. Firms use a relatively small share of unskilled labor in most cities. d. The productivity of the workers is relatively low.
Suppose the price elasticity of supply for soccer balls is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for soccer balls causes the price of soccer balls to increase by 20%, then the quantity supplied of soccer balls will increase by about
a. 0.67% in the short run and 0.17% in the long run. b. 3% in the short run and 1.2% in the long run. c. 6% in the short run and 24% in the long run. d. 66.7% in the short run and 16.7% in the long run.