Question

Is an allegory of what happened in the U.S. economy during the great recession of 2008-2009. Therfore, starting from a position of equilibrium in AD-AS, explain what happened to U.S. economy during the great recession of 2008-2009. what did the U.S. goverment and/or the Fedreal Reserve do to get the U.S. out of recession? What eventually happened in 2015-2016 to improve the U.S. economy, GDP, and unemployment, while also decreasing prices? (Explain graphically and writing)

Answer 1

The Great Recession—which officially lasted from December 2007 to June 2009—began with the bursting of an 8 trillion dollar housing bubble. The resulting loss of wealth led to sharp cutbacks in consumer spending. In the last few months we have seen several major financial institutions be absorbed by other financial institutions, receive government bailouts, or outright crash. Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 to its trough in 2009Q2, the largest decline in the postwar era (based on data as of October 2013). The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009, and peaked at 10 percent in October 2009.

The United States economy is only halfway through a recession that started in December 2007 and will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout all of 2009 for a cumulative output loss of 5%.

The Federal Reserve’s response to the crisis evolved over time and took a number of nontraditional avenues. Initially, the Fed employed “traditional” policy actions by reducing the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with much of the reduction occurring in January to March 2008 and in September to December 2008. The sharp reduction in those periods reflected a marked downgrade in the economic outlook and the increased downside risks to both output and inflation (including the risk of deflation).

One last look at 2008 will reveal a very weak fourth quarter with GDP growth contracting about -6% in the wake of a sharp fall in personal consumption and private domestic investment.

I see the real GDP growth contraction playing out through the year as follows: first quarter 2009: -5%; second quarter 2009: -4%; third quarter 2009: -2.5%; fourth quarter 2009: -1%--adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.

This forecast is much worse than the current consensus forecast seeing a growth recovery in the second half of 2009; I also predict significantly weak growth recovery--well below potential--in 2010.

As of this writing in 2013, however, real GDP is only a little over 4.5 percent above its previous peak and the unemployment rate remains at 7.3 percent. With the federal funds rate at the zero bound and the current recovery slow and grudging, the Fed’s monetary policy strategy has continued to evolve in an attempt to stimulate the economy and fulfill its statutory mandate. Since the end of the Great Recession, the Fed has continued to make changes to its communication policies and to implement additional LSAP programs: a Treasuries-only purchase program of $600 billion in 2010-11 (commonly called QE2) and an outcome-based purchase program that began in September 2012 (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Moreover, the increased focus on financial stability and regulatory reform, the economic side effects of the European sovereign debt crisis, and the limited prospects for global growth in 2013 and 2014 speak to how the aftermath of the Great Recession continues to be felt today. If 2016 comes in below 1.6% (the 2011 level), it would make this year the weakest since 2009, when the U.S. economy was in the midst of the Great Recession.