Question

Refer to the Mini Case on page 496 per the text book, under You're the Economist

"Does the Stock Market Crash Cause Recession?"

Answer the following question in no less than 1-2 pages.

- Immediately following the attack on the United States on September 11, 2001, the stock market plunged and many observers predicted recession. Additionally, a similar situation occurred when the housing market bubbled popped in 2008-2009, with another potential recession. Based on both historic impactful events use the consumption and investment functions, and explain these predictions.  

Answer 1

The 9/11 attacks caused significant economic damage on US, undulating through global economic markets. The trading at stock excanges like NYSE(New York Stock Exchange) and NASDAQ got cancelled for few days. All the banks and other financial institutions were evacuated because of the fear of attacks. After the World War I and Great Depression of 1933 this was the third time that market was hit so badly.

Meanwhile, the prices of oil, gas and gold shot up drastically. The attacks further strained the economy and pushed it into the recessionary grounds.

More spendings and investments were been made on defence and security, which was called "War on Terror", so as to fight and wipe out the terror funding organization, which in the long-run caused debt crisis in US.

The revenue coming from taxation fell drastically because of the job cuts and fewer creation of new jobs which also hampered the consumption capacity of the people.

The central bank infused more and more liquidity in the market to control the situation and prevent economic crisis.

Similarly, the economic downturn of 2007-2009, which was called "the Great Recession", devastated the worlwide financial markets, banking and real estate industries.

As the recessionary forces affected the manufacturing, retail business and trade, and other business and professional service providers because of low investments and greater savings. The fall in investment factor lead to lesser production capacity and thus, this contracted the GDP rate sharply

Most of the people lost their jobs and the rate of unemployment rose resulting in decreasing the purchasing power and affecting the consumption pattern of the people at large. The demand for luxury items like cars, jewellery etc fell drastically, as people could only afford their daily and basic needs.