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Impact of the great recession

An image of a new home construction that appears to have most of the exterior completed but which clearly is not finished and has been abandoned for some time.
The impact of the Great Recession can be seen in many areas of the economy that impact our daily lives. One of the most visible signs can be seen in the housing market where many homes and other buildings are abandoned, including ones that midway through construction. (Credit: modification of work by A McLin/Flickr Creative Commons)

The Great Recession ended in June 2009 after 18 months, according to the National Bureau of Economic Research (NBER). The NBER examines a variety of measures of economic activity to gauge the overall health of the economy. These measures include real income, wholesale and retail sales, employment, and industrial production. In the years since the official end of this historic economic downturn, it has become clear that the Great Recession was two-pronged, hitting the U.S. economy with the collapse of the housing market and the failure of the financial system's credit institutions, further contaminating global economies. While the stock market rapidly lost trillions of dollars of value, consumer spending dried up, and companies began cutting jobs, economic policymakers were struggling with how to best combat and prevent a national, and even global economic collapse. In the end, policymakers used a number of controversial monetary and fiscal policies to support the housing market and domestic industries as well as to stabilize the financial sector. Some of these initiatives included:

  • Federal Reserve Bank purchase of both traditional and nontraditional assets off banks' balance sheets. By doing this, the Fed injected money into the banking system and increased the amounts of funds available to lend to the business sector and consumers. This also dropped short-term interest rates to as low as zero percent and had the effect of devaluing U.S. dollars in the global market and boosting exports.
  • The Congress and the President also passed several pieces of legislation that would stabilize the financial market. The Troubled Asset Relief Program (TARP), passed in late 2008, allowed the government to inject cash into troubled banks and other financial institutions and help support General Motors and Chrysler as they faced bankruptcy and threatened job losses throughout their supply chain. The American Recovery and Reinvestment Act in early 2009 provided tax rebates to low- and middle-income households to encourage consumer spending.

Four years after the end of the Great Recession, the economy has yet to return to its pre-recession levels of productivity and growth. Annual productivity increased only 1.9% between 2009 and 2012 compared to its 2.7% annual growth rate between 2000 and 2007, unemployment remains above the natural rate, and real GDP continues to lag behind potential growth. The actions taken to stabilize the economy are still under scrutiny and debate about their effectiveness continues. In this chapter, we will discuss the neoclassical perspective on economics and compare it to the Keynesian perspective. At the end of the chapter, we will use the neoclassical perspective to analyze the actions taken in the Great Recession.

Introduction to the neoclassical perspective

In this chapter, you will learn about:

  • The Building Blocks of Neoclassical Analysis
  • The Policy Implications of the Neoclassical Perspective
  • Balancing Keynesian and Neoclassical Models

In Chicago, Illinois, the highest recorded temperature was 105° in July 1995, while the lowest recorded temperature was 27° below zero in January 1958. Understanding why these extreme weather patterns occurred would be interesting. However, if you wanted to understand the typical weather pattern in Chicago, instead of focusing on one-time extremes, you would need to look at the entire pattern of data over time.

A similar lesson applies to the study of macroeconomics. It is interesting to study extreme situations, like the Great Depression of the 1930s or what many have called the Great Recession of 2008–2009. If you want to understand the whole picture, however, you need to look at the long term. Consider the unemployment rate. The unemployment rate has fluctuated from as low as 3.5% in 1969 to as high as 9.7% in 1982 and 9.6% in 2009. Even as the U.S. unemployment rate rose during recessions and declined during expansions, it kept returning to the general neighborhood of 5.0–5.5%. When the nonpartisan Congressional Budget Office carried out its long-range economic forecasts in 2010, it assumed that from 2015 to 2020, after the recession has passed, the unemployment rate would be 5.0%. From a long-run perspective, the economy seems to keep adjusting back to this rate of unemployment.

As the name “neoclassical” implies, this perspective of how the macroeconomy works is a “new” view of the “old” classical model of the economy. The classical view, the predominant economic philosophy until the Great Depression, was that short-term fluctuations in economic activity would rather quickly, with flexible prices, adjust back to full employment. This view of the economy implied a vertical aggregate supply curve at full employment GDP, and prescribed a “hands off” policy approach. For example, if the economy were to slip into recession (a leftward shift of the aggregate demand curve), it would temporarily exhibit a surplus of goods. This surplus would be eliminated with falling prices, and the economy would return to full employment level of GDP; no active fiscal or monetary policy was needed. In fact, the classical view was that expansionary fiscal or monetary policy would only cause inflation, rather than increase GDP. The deep and lasting impact of the Great Depression changed this thinking and Keynesian economics, which prescribed active fiscal policy to alleviate weak aggregate demand, became the more mainstream perspective.

Questions & Answers

what is the cause of a country's population
Destiny Reply
what is producer surplus
Destiny Reply
is the excess earns btn wat a producer was willing to charge for e commodity and wat actually receives after selling it
rivan
OK good
Destiny
yeap
Bright
what is supply curve
Destiny Reply
are curve that do not obey the law of supply eg aren't +ve
rivan
half of 1%
Destiny
as in what do u mean by that
rivan
it simply shows the quantity of goods that a film is willing to supply at each price of a commodity
Destiny
OK what is the law of supply as u said
Destiny
It is the indifference curve that indicates the aggregate responsiveness of supply to the price of a commodity, and sometimes its demand of that same commodity.
Gh
nice
Destiny
pls explain how indifference curve connects to the aggregate responsiveness of supply to the price of a commodity
JOSHUA
law of supply according to me states that wen thea z higher price of commodity, the higher will be the supply and lower the supply will be for a commodity other factors remain constant
rivan
Joshua be clear to your QN plizzz
rivan
pls read Gh's comment and break down for me
JOSHUA
may be he can explain more because am am also not getting what he was meaning in that statement
rivan
plizzz GH explain to us
rivan
what is consumers surplus
Destiny Reply
is a difference btn consumers planned expenditure and actual experience on the commodity
rivan
OK good
Destiny
What exactly are factors that affects Demand and Supply?
Chandrapaul Reply
demand factors price o commodity size o population level o advertising season 4 commodity testes and preferences price o other related commodity level o consumers income government policy on taxation
rivan
supply factors general price level natural factor level o taxation technology political climate cost o production number o producers aggregate demand working conditions
rivan
yea___ Demographical psychographical geographical factors also account for determination of demand and supply
Gh
definition of economics
Emmanuel Reply
economics means to manage the limited resources one has in order to maximize satisfaction.
sekou
Economic is a science which study of human behavior as a relationship between and scare means which have alternative uses"
Jacob
what is price elasticity of supply
Destiny Reply
What is the law of demand and supply
Destiny
This is when there is a greater percentage change in the supply of commodities as per the percentage change in price. More producers tend to supply more when there is a higher change in the price of commodities and vice versa when price drops.
Gh
this seems to explain making decisions on the margins very clearly
JOSHUA Reply
what are the importance of studying Economics ?
Amoako Reply
Economization
Zeleman
to relate economic principles to the problems o development. exposes students to e future. acquire knowledge. etc ....
rivan
it teaches how to make choice and decisions in our homes and every across the nation
Destiny
what is price elasticity of supply
Destiny
five definition of economic s
Emmanuel
what is monopoly
Baku Reply
is a structure where one seller of a commodity has no close substitute with very many buyers
rivan
tanx
Baku
a market structure where a particular good has no close substitutes
Koushik
examples railways
Shashank
is one man business where there is no competetor/competetion and vice versa
Destiny
what is income elasticity of demand.
kwagala Reply
percentage change in quantity demanded/percentage change in income
Koushik
or is the measure of degree of responsiveness o quality demanded o the commodity to change in the income of consumer
rivan
percentage change in quantity ÷ percentage change in income
Baku
it the percentage change in quantity over percentage in surply
Destiny
the percentage change in quantity over percentage change in income at the end of the day's work done
Destiny
what is medium
Chinedu Reply
what is medium in terms of economics
Chinedu
as u mean medium of exchange or just as a word
rivan
Your question is not clear @Chinedu. In economics medium is often used in relation to time e.g medium term. So you need to be more specific on which medium you mean. Otherwise it "medium" means what it means everywhere else.
elizabeth
what is medium of exchange
JOSHUA
What is the difference between inferior goods and complementary goods
Bernard Reply
inferior goods are goods whose demand reduces as consumers income increases
rivan
while complementary goods are goods which are jointly demand
rivan
Wow thanks
Bernard
you are welcome
rivan
define the term derived demand
rivan Reply
anyone to help with QN
rivan
situation in which a product is acquired not for it's sake but to help in the production of other goods. for example we say labour has a derived demand becos labour services is required to help in the production of other goods and services.
PETER
The Market equilibrium quantity is___ tons of bolts, the socailly optimal quantity of bolt production is ____ tons
Jackie Reply
please what are the key principles of Economics?
Amoako

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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