Great Recession Essay

1012 Words 5 Pages
Research on Great Recession
Fangyuan Zhang
The Great Recession is the name given to the economic contraction which occurred in the United States that started by the end of 2007. The contraction became magnified in 2008 and nearly part of 2009. The great recession had a severe impact on the labor market. Based on the chart blow, the unemployment rate rose from 5 percent in early 2007 to 10 percent in 2009. Moreover, unemployment rate still remains high, above 9 percent above through 2010. Another effect brought by great recession is behavior of the Federal Funds rate. The Fed lowered interest rates throughout 2007 and by the fall of 2008 the Fed Funds rate had effectively zero and remains about two years. The last effect,
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Stock prices declined by nearly 60 percent, most of which occurred in 2008 and the early part of 2009. Regarding the fixed-income bonds, the corporate bond spreads shot through the roof at exactly the same time. Causes:
Actually in the early of 2008, there are some signs of the recessions. The collapse of Bear Stearns and the resulting financial market turbulence signaled that the crisis would not be mild as well as brief.

The recession began after the end of 2007 global credit crunch and has led to a prolonged period of low growth and rising unemployment. In particular, the great recession highlighted problems within the Eurozone and, unlike the US, Europe has experienced a double dip recession.
Financial institutions mainly investment banks took a major parts in causing great recession. When investment banks became large and public, they had more rights to use the money to do the risk investment. This risk investment was supported by financial deregulation policy, which was advocated by the administration of President Reagan, President Clinton and President George W.
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While, the output will be effected to be decreased from Y1 to Y2 If we take the long-run and short-run together into consideration, when the demand decreases depressing output and employment rate in the short run. After that, the price falls to P2 and the economy moves down its demand curve toward full employment. When the government want to save the economy from the great recession, the first thing the Fed should do is to adopt expansionary monetary policy. When Fed adopt the expansionary monetary policy, supply curve will raise and the price level will go up to P2. After that, Fed accommodates the shock by raising aggregate demand from AD1 to AD2. As a result, price level is permanently higher, but GDP (output) remains at its full-employment level.

Regarding the IS-LM model, the Great Recession will decrease consumer’s confidence leading to a downward in consumption. So, IS curve shifts to the left and GDP (Output) decline. For the LM curve, the inflation falls, interest rates increase and planned expenditure decline, making LM move upward. Income and nominal interest rate go down due to these

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