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Macroeconomic Issues 2007-2013. The Great Recession: GDP begins to drop. Shaded area = recession. Employment falls. Unemployment Rises. The Stock Market Plummets. The Deficit Explodes. National Debt Grows. The Federal Reserve Prints Money. The beginnings of the great recession.
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The Great Recession: GDP begins to drop Shaded area = recession
The beginnings of the great recession • High risk (“sub-prime”) mortgages became more common over past decade • Low down-payments • Poor credit histories • Mortgage default rates rise in 2008 because • Housing prices fell • Adjustable rate mortgages “reset” • Worsening economic conditions • Nearly 5 million homeowners lost their homes between 2008 & 2010
The Financial Crisis of 2008 • Financial institutions experience significant losses due to defaults on mortgages. • Several failing financial institutions either acquired by others or go bankrupt. • Federal Reserve and U.S. government extend aid to financial institutions • Fed lends money to banks • October 2008: Federal government establishes $700 billion TARP (troubled asset relief program) • Stock market drops nearly 50% in 2008 • Difficult for business to borrow • Consumers cut back on spending
Government attempts to stimulate the economy • Feb 2008: Economic Recovery Act • Approval of $168 billion stimulus package • Tax rebates to 130 million households • $600 for single • $1200 for married • “booster shot” for the U.S. economy
Government attempts to stimulate the economy • American Recovery and Reinvestment Act passed in February 2009 • $288 b. in tax cuts and benefits • Housing, cash-for-clunkers, etc. • $224 b. for education, health care, and entitlement programs • Health insurance for unemployed, extended unemployment benefits, etc. • $275 b. for federal contracts, grants and loans • Support to states, roads, etc. • Federal Reserve and Quantitative Easing
On-going Issues • Deficit reduction & Debt ceiling • will be reached in Feb 2014 • Raises taxes and/or cut spending • Entitlement program reform • Monetary policy, interest rates and inflation. • Slow growth in U.S. economy • Unemployment has improved, but still above pre-recession levels • Structural change occurring • Baby boomers retiring • Technological change & worker skills • Policies to improve growth in economy