Macroeconomics Individual Project on the 2007 US Economic Crisis

This individual project for TECO602 Macroeconomics explains the origin, extent, and effects of the 2007 US economic crisis on GDP, inflation rate, labor market, consumption, investment, and government budget. It also suggests policy remedies for macroeconomic variables.

Individual project for
TECO602
Macroeconomics

Contents
1. Explain the origin of this crisis. Provide a summary of this crisis, consisting of the reasons of this
crisis, and the breadth and extent of the crisis. Identify countries and markets involved in the crisis....3
2. Explain the effect of this crisis on USA’s GDP in long-run?..................................................................3
3. Explain the effect of this crisis on USA’s inflation rate in long-run?.....................................................4
4. Explain the effect of this crisis on USA’s labour market in long-run?...................................................4
5. Explain the effect of this crisis on the levels of Americans’ consumption in long-run?.......................5
6. Explain the effect of this crisis on the levels of USA’s investment in long-run?...................................5
7. Explain the effect of this crisis on USA government’s Budget in long-run?.........................................6
8. Assume that you are a policy maker in USA’s government and central bank; how you can recover
the crisis by changing macroeconomic variables?...................................................................................7
9. During the crisis, How USA can recover its output gap if it faces an expansionary gap?.....................9
10. During the crisis, How USA can recover its output gap if it faces a contractionary gap?...................9
REFERENCES..............................................................................................................................................11

1. Explain the origin of this crisis. Provide a summary of this crisis, consisting of the reasons of
this crisis, and the breadth and extent of the crisis. Identify countries and markets involved
in the crisis
The economic crisis in the United States started in 2007 as a result of the decline of the US
home financing industry, which resulted in a significant capacity compression. It was on the
verge of collapsing the worldwide monetary system in terms of a business bank's actions, which
included substantial investments, lending institutions, health insurers, and credit and savings
organizations. Since economic hardship travels regularly and does extend to other nations, a
country's crises can influence the economy of other nations. The hardening of financial
conditions, such as rising interest rates, market transaction slowdowns, and a drop in gain
traction, is the primary determinant of financial upheaval. The confidence collapse in various
institutions resulted in economic crisis in 2007. Several of the causes of the financial crisis are as
follows:
Owning to rule, the mortgage credit crunch gave birth to futures. Notwithstanding all
attempts to address these financial issues, the Global Economic Downturn resulted. Furthermore,
due to a drop in monetary base in the US cost - effective approach by the financial meltdown, the
reserve bank of the United States was a significant role in the onset of the global financial. Many
nations were afflicted by the worldwide development of crises, including Mexico, Ireland,
Hungary, the Baltic states, Ukraine, and Russia in Europe, and Brazil in South America. The
following countries, Hong Kong, China, Japan, and India, had a major impact on Asian region.
2. Explain the effect of this crisis on USA’s GDP in long-run?
Even during financial crisis in 2007, the United States' job expansion was favorable, with a
modest increase. The US country's economic output remained generally steady. Although the
increase of the gross domestic product was largely steady, the inflationary effects on the US
industry were limited.
In the United States of America's business in 2008, the nation's worldwide economic
expansion was important. Nevertheless, as the industry continued to be affected by the recession,
the rate of increase slowed dramatically. The United States of America's annual growth rate in
2008 was favorable, with little influence from the financial meltdown.

However, since 2007 was the first day of the recession, the cost of productivity expansion
was much smaller. The GDP numbers for 2009 provide some indication of the financial crisis
that afflicted the US regional economy. The United States of America started to see strong
economic growth in the second quarter of 2009. The united state was capable of achieving the
greatest positive increase in gross national product in the final quarter of 2009, reducing the
effects of the crisis on the sector.
3. Explain the effect of this crisis on USA’s inflation rate in long-run?
During the economic years of 2007 and 2009, the economic crisis that started of America did not
subside as predicted. Nonetheless, considering the country's economic resilience and the
accompanying fall in jobless underneath the general macroeconomic level of unemployment, it
has remained consistently lower than the economic growth expectations ever since.
Inflation's influence on the US economy was as follows.
1. The worth of the US dollar drops in value, increasing the amount of imports in that country
and contributing to inflationary.
2. Oil and gasoline costs have been steadily rising.
3. Raise the nation's taxes for a long time.
4. The increase in unused capacity was less than anticipated. The rate of interest was zero, and
there were less bank failures than the previous year. In addition, the primary concern this year
was a high unemployment rate relative to the earlier year.
5. By not reducing prices, the companies were able to retain a steady stream of income.
6. A drop in the price of produced supply as a result of the nation's worldwide downturn.
7. The pound was overvalued in comparison to the precious metal. Also, because to the inflated
currency rate, lower inflation.
4. Explain the effect of this crisis on USA’s labour market in long-run?
As during Global Recession, the proportion of moderately connected and disengaged
employees increased significantly, while the workforce participation rate decreased. The

percentage of workers who report laboring portion unwillingly for financial reasons is still
significant. At its lowest point, the rate was 17%. As a result, unemployment rates soared in
during Great Recession, house values and investment portfolios fell, and millions of people's
lives were upended. At about the same period, the labour market has been difficult to revive.
While unemployment has returned to which was before norms, it takes roughly 10 years from the
beginning of the Great Recession to accomplish so, considerably longer than prior downswings.
Furthermore, the current unemployment rate's modest but steady reduction conceals a number of
linked facts that point to ongoing labour market instability. As during Great Recession, the
proportion of moderately connected and demoralized employees increased significantly, while
the labor participation rate decreased. According to some estimates, nearly 30 million people out
of work, and the percentage of lengthy unemployed quadrupled from its previous peak.
(1) There will be a considerable rise in the unemployment rate.
(2) Spending will fall as a result of people's tendency to conserve during a downturn.
(3) Investment levels will be reduced as a result of the crisis.
(4) Public spending is expected to rise.
(5) The administration and central bank must employ fiscal policy to modify government
expenditure and monetary policy to enhance monetary policy in order to emerge from the crisis.
(6) Increase state spending while lowering taxation.
(7) Implementation of aggressive monetary policies
5. Explain the effect of this crisis on the levels of Americans’ consumption in long-run?
People are more likely to conserve money during a recession because their confidence is
low. Keynes observed that during the Great Recession, there was a contradiction of frugality, in
which individuals saved even more consumed less, exacerbating the slump by causing additional
reductions in consumption. The few research that explicitly quantify the impact of job loss or
unemployed on consuming usually reveal significant relatively close reductions in spending but
no indications of lengthy consumption increases. Consumption reactions are disproportionately
weighted at the lowest income scale. Additionally, as previously said, when consumption rises

(in an inefficient manner, as we will see later), the economic base must extend to satisfy
development and associated needs. Whereas if economic base extends to include other person's
territories, these individuals may not be able to use the commodities. The economy shrank
dramatically during the "Great Recession," which lasted from late 2007 to mid-2009, and over
8.7 million jobs have been lost. 6 Average spending has dropped to its lowest level since Second
World War. In reaction to decreases in earnings, assets, security, and credit availability,
households curtailed spending, paid off debt, and boosted their saving account rate. From 2007
and 2010, labor sustained by U.S. consumer spending fell by an estimated 3.2 million jobs,
accounting for over a third of all job losses during that time period. User employment, as
contrasted to the entire economy, has shown considerable resiliency, rebounding in 2012.
6. Explain the effect of this crisis on the levels of USA’s investment in long-run?
This is certainly true in terms of loan accessibility. Credit was overly available even during
bubble in several nations on the peripheral of Europe by popular agreement. Global markets
mainly supported spending and investment, which, in perspective, were only available because
risk aversion was skewed by the credit bubble.
Imports and investment (in equipment) statistics support the spending patterns, although with
larger fluctuations following the initial recession. The link between pre- to post crisis importation
gdp growth is significantly negative and considerably higher than what has been found during
the dot-com boom, but adverse in both instances.
Despite the high positive mean well before catastrophe and the unfavorable mean in the years
after the bust, connection in the case of financial rates of growth is very weak (nearly zero) and
weaker than it was during the dot-com boom. The statistics easily indicate an universal drop in
investments throughout all nations throughout the collapse phase, while all growth figures
incoherently minus and a decrease after the collapse considerably bigger (in real numbers) than

the rise during in the bubble. Economic uncertainty grew substantially throughout 2008/9, as
according financial sector indices.
7. Explain the effect of this crisis on USA government’s Budget in long-run?
Around the time of the Great Recession, the elements of the federal budget altered
dramatically. As per a latest Economic Synopses piece, meanwhile, the national budget hasn't
changed quite as much.
Chief Economist Fernando Martin began by looking at the federal budget's four major
variables: revenue, disbursements, deficit, and fiscal deficit. In terms of GDP, each four were
investigated (GDP). Members also addressed the Budgetary Office's (CBO) estimates for the
next ten years.
Revenues: Martin pointed out that tax provisions enacted in the aftermath of the previous two
downturns resulted in lower tax collections, which represented 17.5 percent of GDP in the
months prior the Great Recession. Earnings accounted for 15.6 percent of GDP from 2008 to
2013. Nonetheless, substantial tax cuts enacted in 2013 aided the restoration of revenues to
average limits. From over ensuing years, they're anticipated to grow at a rate of around 18.1
percent on average.
Outlays: Outlays as a proportion of GDP fell in the 1990s, but rose again in the 2000s, according
to Martin. Owing to financial policy measures to the Global Recession, they also increased,
totaling 24.4 percent of GDP in 2009. Although “outlays remain excessive previous
corresponding period rates and are expected to keep growing within next couple of years,”
Martin said. For the years 2014-16, outlays are anticipated to average 20.7 percent of GDP,
rising to an average of 22.0 percent for the years 2017-26.
Deficit: “The decline in receipts and the growth in outlays from around period of the Global
Recession generated extraordinary deficits (for the post war era),” Martin wrote about
imbalances. The deficit reached 6.8% from 2008 to 2013, after averaged 1.8 percent over the
previous seven years. He pointed out that the deficit, like outlays, surged in 2009, is still high at
the moment, and is expected to increase further.

8. Assume that you are a policy maker in USA’s government and central bank; how you can
recover the crisis by changing macroeconomic variables?
I should state right now that my current emphasis will be on the United States'
macroeconomic issues, as well as policy remedies. Monetary displacements and their effects
have, nevertheless, being experienced all over the world since financial markets and investment
firms are interconnected internationally. Furthermore, other nations have implemented policies
comparable to those implemented in the United States, such as standard and unconventional
financial regulation, financial assistance programmers, and quantitative easing. This is a really
worldwide problem, and it is reassuring to see that the necessity for strong policy solutions to the
major difficulties we confront is widely acknowledged.
Since the present episode's danger to political prosperity has been so tightly connected to
financial industry difficulties, most national policies have concentrated on financial markets, as
well as the availability of money to consumers and companies. That most of these regulations
were implemented in response to the tightness of market circumstances that ensued as bankers
grew more risk cautious and sought to preserve cash and flexibility. Towards that aim, the
Federal Reserve has decided to reduce, provided private money lenders with alternative funding
options, using its existing loan portfolio to attempt to resuscitate a set of investment sectors. In
fact, the Federal Reserve, the Treasury, and the Consumer Financial Protection Bureau (FDIC)
have implemented a variety of actions to strengthen and repair financial companies in order to
minimize their inclination to refuse to lend and, as a result, exacerbate the drop in expenditure.
The monetary policymaker must therefore strike a balance between pricing and production goals.
Even central banks that exclusively pursue deflation, such as the European Central Bank (ECB),
confess that they often actually listen to production stabilization and keeping the country at
economic growth.
Other government initiatives work at the crossroads of the financial and real worlds.
Bankruptcy prevention, for instance, must not only help families return home, but also help
lenders decrease loan losses. Lastly, stimuli spending specifically relating on consumption,
circumventing the banking sector during its first impacts; by increasing consumer spending, it
should also assist relieve lender pressures and assist to breaking the negative spiral. Despite the
fact that I'll be addressing every one of these national policies independently, it's crucial to bear

in mind how they connect. At various places in the cycle of action and reaction, and afterwards
causation over, they all seek to escape into that unfavourable feedback mechanism we've been
discussing. The likelihood of recovery is based in part on the economic growth inherent
rehabilitative capacities, but it also relies on the impacts of different policy initiatives
complementing one another: A good financial plan is essential for achieving the benefits of fiscal
and monetary policy; absent fiscal and monetary stimulation to boost expenditure and improve
credit conditions, the monetary sector will not recover fast.
Whenever a central bank comments publically on fiscal policy, it focuses primarily on the
bond yields it wants to see rather than a precise dollar value (While adjustments in the monetary
base may be required to obtain the appropriate lending rates). Central banks typically concentrate
on a single "policy rate," which is arguably the most common, often nightly, percentage that
companies lend each other to obtain cash.
9. During the crisis, How USA can recover its output gap if it faces an expansionary gap?
The term "expansionary gap" refers to the fact that the country's economic current
production exceeds its productive capacity. Whenever the country's economic consumer
spending exceeds its production, an expansionary gap arises.
The present output deficit expands from $666 billion to $816 billion based on these projections.
Considering a liberal multiplier of 0.4, a baseline quantitative easing of $1.66 trillion is required
to return to near maximum output, and a total stimulus spending of $2 trillion is required to reach
optimum gainful livelihood.
Individuals amounts, however, are basic minimum requirements for restoring the economy to its
full capacity and funding "back pay" for those who have been forced to take lower pay at
replacement employment or who suffered a complete loss of living conditions. This excludes any
measures to upgrade the economy's deteriorating foundation.
As per the International Financial Institutions, all developed economies' output gaps were lower
than the output gap in the United States during the 2007-2009 recession, as indicated in Table 1.
Actual result in 2009 was roughly 4% under productive capacity across all developed nations,
while actual output in the United States was about 5% below productive capacity. Because
stronger trade availability has shifted the influence of the domestic manufacturing gap on

inflation to the worldwide output gap, the lower output gap among some other developed nations
may assist to understand the surprisingly moderate drop in prices following the 2007-2009 crisis.
10. During the crisis, How USA can recover its output gap if it faces a contractionary gap?
One aspect of these peaks and troughs (often defined as the organizational cycle) that
interests US policymakers is just how near power capacity is to an economic growth lengthy
productive capacity. That really is, they are concerned not just with whether GDP is increasing
or decreasing, but also with whether it is exceeding or falling short of its promise. The output
gap is a metric that measures the disparity here between economic growth existing and perceived
production. The highest quantity of services and goods that an organization produces if it's at
max potential is known as total output. Form of value is repeatedly alluded to as the country's
economic output.
Due to the ongoing economic consequences of Trump's actions, as well as the economic
scarring produced by the epidemic, a robust economic reaction is required. The goals are to boost
relatively close development, avert a sub-2 percent annual growth in the 2010-20 timeframe, and
restore full work, which we define as a 3.5 percent jobless rate.

Economists who believe the global production gap has an impact on household inflation have
tried to see if the degree of this influence has expanded in tandem with increased trade
liberalization. Nevertheless, the severity of the effects of the global production gap on local
inflation appears to be independent to changes in market liberalization. Based on this data, it is
doubtful that recent increases in trade liberalization and a reduced production gap overseas
contributed to the surprisingly moderate drop in inflation following the 2007-2009 recession.
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