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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

The equation for a demand curve is P = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
Abdul Reply
mo na pane reponse la accause li tro compliker essay guet avec banne lezot dimune
Abdel
Difference between demand and supply
Amuzu Reply
The quantity that is demanded will be the amount of that product that people are willing to purchase at a certain price; the relationship between quantity demanded and the price is called the demand relationship. Whereas, Supply does represent how much the whole market can offer a certain product or
Rahul
What is resource maintenance
Linda Reply
it is the optimum and continous supply of resources to undertake a task whether manufacturing or service.
Sajad
RM emphasizes a team approach to human error reduction using principles that seek to improve communications, situational awareness, problem solving, decision making, and teamwork by making the availability of facilities,of funding , personnel, spare parts , technical data, test equipments, and tools
Deep
why economics is a social science
Madag Reply
Economics is generally regarded as a social science, which revolves around the relationships between individuals and societies
Rahul
what is planned demand and actual demand?
Jincy
The terms demand planning and demand forecasting are often used interchangeably. Though they are unmistakably linked in the supply chain management process, they are not the same thing. ... Demand planning is a process; accurate forecasts are the results of an effective demand planning process
Rahul
economics projection on how the cost of living , the facilities that can be enhanced or acquired can be utilised and maintained best. How change in demand and supply effect actual social strata and economic earning. the science in economics is the allied application to make society a welfare state
Srikumar
what is repo rate ?
Ankit
Demand planning and sales forecasting is one of the key aspects of manufacturing operations. This is because manufacturing operations need to accurately estimate demand in order to produce the correct amount of goods within a given time
Deep
what is opportunity cost
Linda Reply
opportunity cost, or alternative cost, is the loss of potential gain from other alternatives when one particular alternative is chosen over the others. In simple terms, opportunity cost is the loss of the benefit that could have been enjoyed had a given choice not been made. 
Rahul
when the difference in output to input is either >1 or enhancement of resources are done to rationalise utility we forego a process to maximize on next best opportunity which will be effective change in cost than can be overcome or foregone to get the best result
Srikumar
Thank you
Linda
what is quantity demanded
Oke Reply
Quantity demanded is the quantity of a commodity that people are willing to buy at a particular price at a particular point of time.
Tendai
ok
Duy
what is rational behavior
Kpienta Reply
This is a part of decision making practice wherein an individual/company exercises sensible choice making, which provides him with the optimum amount of benefit.
Sajad
consumer is said to be rational if he or she buys goods which gives maximum satisfaction at a lower price
Duk
defination of perfect Competition
Fatima Reply
is a type of market form in which their are many companies that sell the same products and service
Modou
current economic plans (MDGS) needs
Ajijola Reply
I don't know what is happening
surajkumar
What is economic
Joeali Reply
What is the importance of study economics
Wilma
Economic is the study of how humans make decisions in face of sacristy
Wilma
economics is the study of how humans makes decision in the face of scarcity
Kpienta
economics is the study of human behaviour when faced with difficult situation example when goods and services are scarcity.
Sydney
Economic is the study of human behaviour
Chibuzo
what is Economic
Dauda Reply
what is 4ps of economic?
thomas Reply
production place Price product
Benedict
Criticism of elasticity
Siddikur Reply
what is unemployment
Gyamfi Reply
ohk thanks
Gyamfi
why is unemployment rapid in the country
Gyamfi
I need more explanation
Odo
1st-due to poorly government planning on employment opportunities, 2nd-low level of science and technology can leads to unemployment,3rd education level
Isack
fiscal monitory policy
Abubakar
thi can be said to be,the level of joblessness in an economy.
Omar
I mean "this "
Omar
what is unemployment
Munanag Reply
not working
Bethel
some one who is willing qualified to work but can't find job
jackie
Bethel...explain? please
Abubakar
some one who is willing to work but can't find job
Hawa
Yes true
Brian
which one please
Hawa
unemployment refers to the ability for someone who is capable and willing to work but could not find a job..
Mnoko
some one who not able to find a job
Dennis
please what is the secret of learning?
thomas

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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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