Question

What Happened During the 2007–2009 Recession?

• How were GDP, inflation, and unemployment affected during the recession, and how does the model show this?
• What monetary policies and fiscal policies were implemented during the recession?
• How did the recession affect U.S. trade relations and the U.S. dollar exchange rate?

Answer 1

Economic recession of 2007 -09 was caused by the sub prime loans crisis. it reduced aggregate demand massively and it resulted into widespread unemployment and fall in GDP. Fall in GDP motivated fall in output and employments. Fall in demand also dragged down inflation rate. Unemployment rate increased to 10 % of labor force.

Both monetary and fiscal policies were used by the government, to correct disequilibrium in economy. Expansionary fiscal and monetary policies were followed by the government and central Bank. Government announced huge bailout package to drive up positive sentiments in economy. Further, Fed infused liquidity through quantitative easing programs.

US trade fell severely and its relationships with trading partners hit rock bottom. But gradually, it was recovered. US Dollar exchange rate increased significantly. Main reasons behind it were: flight of capital from developing countries to USA. Second, supply of dollar was not enough. Investors grew suspicious about developing countries. so they considered it right to part their funds in US.