Question

the borrowing was financed by increased 2) Already the electronics retailer Circuit City has filed for bankruptcy, and General Motors has said that it is in danger or running out of cash. If the consumer slump continues, there is a potential for a dangerous feedback loop, in which spending cuts and layoffs reinforce each other. What terminology do economists use to refer to this phenomenon? 3) Consider the loanable funds market. Use the following supply and demand equations to answer the questions below. Assume that r is measured as a percentage and is the quantity of loans measured in billions. r=.5 +.0040 a) Assume that T-G= 0, find the equilibrium interest rate and quantity of loans. b) Show equilibrium graphically, label all axes and intercepts.

Answer 1

2. In economics, this terminology is referred to as multiplier process.

When the firms declare that they are bankrupted or out of cash/business, they would lay off workers. The workers would then be short of income to purchase goods and services, so they will demand less of it. There will be pile of unsold stock, the firms would produce less in the next cycle. And therefore the aggregate demand will decrease.