"The bursting of the housing bubble and the Panic of 2008 caused both households and businesses to cut back on their spending in 2 ways. First, the financial market disruptions made it difficult for businesses to borrow the funds for investment spending and for consumers to borrow the funds for purchasing housing and the motor vehicles. Second, the financial crisis increased the level of uncertainty about the future, which led to a reduction in autonomous spending, or spending independent of output." Source: Ben S. Bernanke, Robert H. Frank, Nils Olekalns and Louis D. Johnston (2010) Economy update 2010, Sydney: McGraw-Hill.
1. Discuss how each change mentioned in the article impacts upon the collective expenditure (AE) model and then describe how such changes result in a new equilibrium in that model. Your answer should encompass discussion of changes to the level of inventories.
2. Discuss the multiplier effect and its effect on equilibrium output stemming from a reduction in 'autonomous spending' by using the AE model.