Government and the Monetary Authority

Two of the most important players in the credit market are the government and the monetary authority. If the US federal government borrows more, this shifts the demand for credit outward and increases the interest rate. (Notice that the government is a big player in this market, so its actions affect the interest rate.) The monetary authority, meanwhile, buys and sells in credit markets to influence interest rates in the economy. [5] In the 2008 crisis, the Federal Reserve Bank, which is the monetary authority in the United States, took many actions to increase the supply of credit and ease the problems in the credit market. The Labor Market The story about the housing market in the United Kingdom at the beginning of this chapter contained some dire predictions about employment:

The lack of spending in these areas will hit employment, with some analysts forecasting that the construction sector alone could see a loss of up to 350,000 jobs within the next five years.

To understand this prediction, we need to look at another market—the labor market. In the markets for goods and services, the supply side usually comes from firms, and the demand side comes from households. In the labor market, by contrast, firms and households switch roles: firms demand labor, and households supply labor. Supply and demand curves for construction workers are shown in Figure 4.10 “Equilibrium in the Market for Construction Workers”. Here the price of labor is the hourly real wage that is paid to workers in this industry. Toolkit: Section 16.1 “The Labor Market” The real wage is the wage corrected for inflation.