macroeconomic issues 2007-2009. the great recession: gdp begins to drop shaded area = recession
TRANSCRIPT
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Macroeconomic Issues2007-2009
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The Great Recession: GDP begins to drop
Shaded area = recession
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Employment falls
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Unemployment Rises
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The Stock Market Plummets
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The beginnings of the great recession• High risk (“sub-prime”) mortgages became
more common over past decade– Low down-payments; – Poor credit histories
• Mortgage default rates rise in 2008 because– Housing prices fell– Adjustable rate mortgages “reset”– Worsening economic conditions
• 5.2 million homeowners predicted to lose their homes between 2008 & 2010
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The Financial Crisis of 2008• Financial institutions experience significant losses
due to defaults on mortgages.– Several failing financial institutions either acquired by
others or go bankrupt.
• Federal Reserve and U.S. government extend aid to financial institutions– Fed lends money to banks– October 2008: Federal government establishes $700
billion TARP (troubled asset relief program)
• Stock market drops nearly 50% in 2008• Difficult for business to borrow• Consumers cut back on spending
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Government attempts to stimulate the economy
• Feb 2008: Economic Recovery Act– Approval of $168 billion stimulus package – Tax rebates to 130 million households
• $600 for single• $1200 for married
– “booster shot” for the U.S. economy
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• American Recovery and Reinvestment Act passed in February 2009– $288 b. in tax cuts and benefits
• Housing,, cash-for-clunkers, etc.
– $224 b. for education, health care, and entitlement programs
• Health insurance for unemployed, extended unemployment benefits, etc.
– $275 b. for federal contracts, grants and loans• Support to states, roads, etc.
Government attempts to stimulate the economy
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On-going concerns: the deficit
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The decline in the value of $
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Other issues
• Will economy have a “double dip”?• Will inflation be a problem in future?• How long before unemployment drops to
previous levels?• Can government balance budget?