1. Financial Crises Mankiw (p. 245)

2. 6 Stages 1. Large decline in some asset prices – Great Depression (Black Sunday – Stock market) – 2008-2009 (real estate) 2. Insolvencies in Financial Institutions – Loans not repaid 3. Decline in confidence in Fin. Inst. – Withdrawls for uninsured deposits – “Fire sale” on loans/assets to increase reserves

3. 6 Stages 4.Credit Crunch – More reserves to cover withdrawls Decreases multiplier -> decreases M1/M2 – Decrease in lending Decrease in investment -> no expansion (labor & capital) Economic downturn Decline in profitability/value of assets – Back to step 1