Economics 2IntroductionIn this essay, the main cause of great recession in USA is discussed by applying economic theories. For answering this question, the concept of recession is discussed to understand and to relate it to the USA economy. A discussion over the caused, which are considered as the reasons of the great recession in the USA economy, is also included in this essay to cover the different views on the topic. At last, the key reason and its role in creating conditions of great recession in the economy of this country is discussed to answer the question with proper justification.RescissionRecession can be regarded as a phase of economic cycle in which the business activities including trade, etc. are less than the usual conditions. This condition indicates that the size of a country’s economy is shrinking. The key measures of economic activity include income, Gross Domestic Product (GDP), employment, production level and demand of goods (Kotila, 2010). Generally, these measures are used by economists to access the condition of an economy. Decline in these measures in two consecutive quarters is determined as the economic recession. In USA, the condition of recession is when “a significant decline in economic activity across the economy, lasting more than a few months” (Seefeldt and Graham 2013). Thus, the recession means the poor conditions of an economy in terms of generating production, income and employment opportunities.Causes of the Great Recession in the USAIn 2008, the phase of great recession occurred in the economy of the USA. The reasons of this recession have been a considerable topic of discussion due to the difference in views and opinionregarding this aspect. In accordance to Farmer (2010), collapse in housing price caused the crash of stock market and it leaded the situation of great economic crisis in the economy of US. The
Economics 3decline in stock market is closely associated with the unemployment rate. By depicting Keynesian economics, the relationship between stock market and employment rate is shown. In accordance to this theory, decline in investment affects the level of GDP and consequently demand of job that caused unemployment in a country. It creates conditions of economic recession. According to (), housing bubble was the main cause of recession in USA. The prices of houses inthis country was at peak in early 2006 and after this, it started to decline that caused increase in number of loan defaulters. It affected the functioning of the whole financial system, which originated economic recession. In oppose to this, Brandl (2016) stated that deregulation in the financial system is one of the key causes of depression as due to which financial institutions lent large sum of money to the individuals without evaluating their credit worthiness. Due to this, the financial system in US failed to prevent the financial crisis as the system was broken. The rules and regulations for regulating the banks in this country are quite complex, which cause difficulties in keeping strict, watch over the functions of regulatory system of banks. On the other hand, Schularick and Taylor (2012) stated that government policies including monetary policy are key cause of financial crisis. In modern economies, financial system itself causes instability, recession and consequently crisis in the economy due to the ill-regulated creditsystem supported by the monetary policies of the government. From above discussed causes, it isconsidered that below is the main cause of great recession in USA: Government Responses to Crisis through Monetary PolicyIn the formulation of monetary policy of a government, the role of credit was overlooked by the policy makers. In accordance to the pre-crisis Keynesian consensus, inflation and output gap were the key important factor to set the monetary policy and thus the role of credit or monetary
Economics 4aggregates and money both were ignored. The great recession in USA challenged this view and thus arguments for the importance of information in relation to money and credit in decisions of policy makers has aroused (Verick and Islam, 2010). Monetary policy is used by a tool by the financial authorities of a country to control money supply in the market by targeting interest or inflation rate. There are two forms of monetary policies such as expansionary and contractionary employed to control money supply. In expansionary policy, money supply is increased by different ways such as decreasing interest rate and reducing reserve ratio or repo rates (Montiel, 2011). In contrast to this, contractionary policy is adopted to decrease the money supply. In the first six years of the 21st century, the household debt was accumulated unequally and thus causes sharp decline in the consumption that caused rescission in the USA. The Dotcom Bubble and the terrorist attack at the end of 20th century and at the beginning of 21st century respectively were slumped the US economy into recession. The policy makers used monetary policy to rescuethe economy from the conditions of recession. The expansionary monitory policy has adopted bypolicy makers and this caused significant decline in the interest rate from 1999 to 2004 (Van Alfen, 2014). The below chart depicts the interest rate during this period:
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