MACROECONOMICS SPRING ESSAY

Question 1

            The Great Recession of 2007-2009 mainly started with the bursting of an eight trillion housing dollar bubble. During this time, the economy mainly depended on the housing bubble. Unfortunately, the collapse of the housing bubble, especially the residential construction, is what made it to decrease by 4 percent. Furthermore, consumer consumption and the gross domestic product (GDP) facilitated by the housing bubble also decreased sharply (Congdon, 2017).  This, therefore, developed a great gap in yearly demand (GDP) of almost 1 trillion US dollars. As a result of that, the government was not ready to revive the private sectors’ shortfall.

1. a) The housing bubble_ As a result of that, the loss of individual wealth ended up inducing sharp cutbacks in customer spending. Thus, the progressive decline in consumer expenditure, combined with economic market turmoil brought by the housing bubble, is what resulted into the collapse of business investments. Furthermore, as a result of the decline of business investment and consumer spending, there was a massive loss of jobs.
2. b) The shadow banking system_ another cause of the Great Recession was the existence of equal bank run on the shadow banking system that incorporated investment financial institutions as well as other non-depository monetary entities. The reason for that is because it was noted that the shadow banking system had managed to grow to the extent of escalating rivalry existed with the depository system in scale, despite the fact that it was not subjected to similar regulatory safeguards.
3. c) Government policies_ the failure of the government to have the potential of regulating non-depository banking is also another factor that ended up encouraging residential ownership even to those individuals who could not have afforded them. This in return contributed to sloppy lending systems, indebtedness, and unstable residential price increase.
4. d) Financial turmoil_ the financial chaos of the year 2007-2009 also lead to a sharp increase in demand for money, something termed as precautionary hoarding. As a result of that, it ended up triggering a resultant decrease in the demand for commodities (Congdon, 2017).
5. e) The high record levels of the existing household debts extensively accumulated as compared to previous years hence resulting into a balance sheet recession. Consumers were forced to pay down debts, which in return reduced their consumption rate. Because of that, it ended up slowing down economic growth for decades although consumers’ debt levels were decreased sharply.

Question 2

            Considering the data collected regarding recessions, the significance of it is that it forced policymakers and economists to re-think about their basic understanding of macroeconomics for the years to come. For instance, the unique standing of the recession of 2007-2009 can be ultimately attributed to length, severity, as well as the extent to which the economy ended up weakening its magnitude (Gross Domestic Product, 2019). Moreover, despite that fact that recessions are always defined principally in terms of the real gross domestic product (GDP), the data collected suggests that the number of individuals in such an economy is one of the accessible measures of the harshness of economic downturns (Gross Domestic Product, 2019). As a result of that, such information is also used in measuring the public perception about the economy.

            Another significance of this data is that economists use it for the purpose of curing inflation. From the economic point of view, the Federal Reserve is always forced to ensure that they have slowed down the economy to appoint of preventing inflation without stimulating recession. In most cases, the information collected assist economists in understanding how various fiscal policies are used to regulate or stabilize the economy. On the same note, such an information assists in understanding how politicians, who have the mandate of controlling federal budget, tries to trigger their economy through ignoring budget deficit, expenditure on community programs, and lowering taxes (James, 2010).

Question 3

Economically, the gross domestic product is computed as;

                         Enterprise investment + consumer spending + government                                                spending + (exports – imports)

                                    = I + C + G (X-M)

During the start of the recession (2007), the GDP and the employment rate obtained was 14,208.569 billion dollars. By the end of the year, the GDP and employment rate obtained was 14,681.501 billion dollars. This implies that by the end of 2007, the change in GDP was;

                                    = (14,208.569 -14,681.501) billion dollars

                                    = 472.932 billion dollars                          decrease

At the start of the recession 2008, the GDP and the employment rate obtained was 14,651.039 billion dollars. By the end of the year, the GDP and employment rate obtained was 14,559.543 billion dollars. This implies that by the end of 2008, the change in GDP was;

                                                = (14,651.039 -14,559.543) billion dollars

                                                = 91.496 billion dollars                                           decrease

At the start of the recession 2009, the GDP and the employment rate obtained was 14,394.547 billion dollars. By the end of the year, the GDP obtained was 14,628.021 billion dollars. This implies that by the end of 2008, the change in GDP was;

                                                = (14,394.547 -14,628.021) billion dollars

                                                = -233.474 billion dollars                             slight increase

Considering the above trend, it implies that from 2007 to 2009, the recession was rising steadily (Gross Domestic Product, 2019).

Question 4

            The monetary policy that has the potential of lowering interest rates as well as stimulating borrowing is termed as being a loose financial policy or expansionary financial policy. Additionally, a financial policy that has the ability of raising interest rates as well as reducing money borrowing in the economy is regarded as being a tight financial policy or contractionary financial policy. Taking into account this explanation, it implies that the existing monetary policies at that time had many guises. Regardless of that, the truth is that it has the ability of adjusting the general supply of money in the economy so as to be in the position of achieving output stabilization and some combination of inflation (Gross Domestic Product, 2019).  

            Nevertheless, a large percentage of economists approve that in the long run, the GDP (gross domestic product) is the one that have the ability of changing the supply of money in the economy. Regardless of that, in the short run, salaries, wages, and prices of commodities do not have the capacity adjusting immediately. The reason for that is because the supply for money ultimately has the ability of impacting the actual manufacture of goods and services. This is what makes the monetary policy used to be a reasonable tool for realizing the economic and inflation objectives (Gross Domestic Product, 2019).

            As inflation gets adjusted, interest rates are in return enhanced by the decline in business production. This is because of the decrease in consumer spending which is coupled with the laying off of employees by the money lending institutions as well as the need of stopping investing in the new economy. This then implies that the increasing demand coupled with the general decrease in the money lending interest rates is what monetary rates tries to adjust so as to stabilize the economy (Claessens & International Monetary Fund, 2014).

            Economists suggest that the continued fluctuations in interest rates do not have a standardized effect on the existing economy. The reason for that is because some sectors of the economy become more affected as compared to other in the same industry. Ideally, some business organizations have the ability of adjusting quickly with changes in interest rates (Mian & Sufi, 2014).

Question 5

            Fiscal or monetary policies are some of the tools used by the government to control the economy.  These tools mainly take into account government expenditure as well as levied taxes. Usually, a policy is perceived as being expansionary in case taxes are lower or when expenditure increases. Furthermore, when fiscal policy is termed as being contractionary, it means that it has the ability of decreasing or increasing taxes. Therefore, in this case, expansionary fiscal policy is the one which is perceived to have the ability of inducing high budget deficits (Claessens & International Monetary Fund, 2014). This implies that the government can obtain surpluses when it incurs more expenditure as compared to taxes or operates on deficit when its expenditure is more than the taxes levied. 

            Nevertheless, the government can have the potential of spending beyond the tax they levy through borrowing some funds from other private sectors. For instance, it is such a scenario which forces the United States Government to issue Treasury Bonds for the purpose of raising funds. As a debtor, in order to be in the position of meeting its future commitments, the state will have no option other than cutting its expenditure, increasing tax receipts, or seek additional funds from external lenders (Mian & Sufi, 2014).

Question 6

            Considering the recession of 2007-2009, it implies that the pending policies and the federal tax always have significant impacts on an economy. The reason for that is because it is those economic impacts that have the ability of affecting the national budget. One of the things that economists need to understand is that such monetary policies always have different impacts on the economy both in the long run and the short run.  The reason for that is because usually the two assists in reflecting the short-term impacts of the recession on expenditure and tax policies on consumer demand for commodities and services.

            Moreover, it is important to understand that tax reductions and increase in expenditure have the ability of increasing consumer demands hence raising employment and output in the next few decades. In order to stimulate the growth of the economy, it is important for government and other stakeholders to ensure that they have adhered to the available fiscal policies to assist in reviving such a recession.

 

 

 

 

 

 

 

 

 

                                                           

                                                            References

Claessens, S., & International Monetary Fund. (2014). Financial crises: Causes, consequences, and policy responses.       Washington, D.C.: International Monetary Fund

Congdon, T. (2017). The causes of the Great Recession: A monetary interpretation. Cheltenham, UK : Edgar Elgar Publishing

Gross Domestic Product. (2019). Retrieved from https://fred.stlouisfed.org/series/GDP

James, S. (2010). Politics and Policy: The Eisenhower, Kennedy, and Johnson Years. Brookings Institution Press

Mian, A., & Sufi, A. (2014). House of debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again. Chicago ; London : The University of Chicago Press