Takeaway
CHECK YOURSELF
Question 14.1
Immediately after 9/11, most U.S. companies eliminated business travel temporarily. After a few weeks, business travel started to pick up again. Which transmission mechanism came into play? Go through as many aspects of business travel as you can think of: air travel, transportation to and from airports, hotel stays, meals out, contact with people remaining back in the office. Explain how the unexpected near-cessation in business travel amplified the original shock.
In sum, at least five factors amplify economic shocks and help bring about business downturns. Those factors are labor supply and intertemporal substitution, uncertainty and irreversible investment, labor adjustment costs, the desire to bunch or cluster economic activity together in time, and collateral shocks. The core lesson is this: A medium-sized negative economic shock is capable of causing a disproportionately large downturn in economic production and employment.