Macroeconomics: Analysis of the 2008 Financial Crisis in the USA

This assignment analyzes the 2008 financial crisis in the USA, examining its origins in deregulation and banking practices, leading to a global impact. It assesses the crisis's long-term effects on the USA's GDP, inflation, labor market (including unemployment), consumption, investment, and government budget. The analysis includes data on GDP growth, inflation rates, and unemployment figures, highlighting the significant economic downturn. The assignment also explores strategies for economic recovery, including emergency funds, avoiding procrastination, opting for less volatile funds, diversifying investments with gold and US funds, and addressing expansionary and contractionary gaps. The paper concludes with an overview of the impacts on key economic indicators and potential recovery measures.

MACRO ECONOMICS

Contents
MAIN BODY...................................................................................................................................4
Question 1. Origin and reason of crisis in USA.....................................................................4
Question 2. Impact of crisis on GDP of USA in long time span............................................4
Question 3. Impact of crisis on inflation rate of USA in long time span...............................5
Question 4. Impact of crisis on labour market of USA in long time span.............................6
Question 5. Impact of crisis on consumption rate of USA in long time span........................7
Question 6. Impact of crisis on investment of USA in long time span..................................8
Question 7 Effect of crisis on USA government budget........................................................9
Question 7 Ways to recover financial crisis...........................................................................9
Question 9. How USA can recover from expansionary gape...............................................10
Question 10. Steps to recover output gap in case of contractionary gap:.............................11
REFERENCES..............................................................................................................................12

MAIN BODY
Question 1. Origin and reason of crisis in USA.
The financial crisis in USA was began in year 2007 and with encompasses of time this crisis
spread all around the world. The origin of this crisis was USA in which raised due to collapse of
investment banks. Due to it, global market also impacted negatively but main cause of this crises
was access to banks to grant loans. This crisis evolved due to below mentioned reasons which
are as follows:
 Deregulation- This was the main cause of financial crisis in which banks were allowed to
involved in hedge funds trade with derivatives. Due to which banks demanded higher
mortgage to support the beneficial sales of the derivatives.
 Owing to change in banking laws- In year 1980, banks were able to provide mortgage
loan to sub-prime customers which was designed with balloon payment (it is a huge sum
of payment that can be due till end of loan period). Due to this ease of loan, percentage of
mortgage loan increased from 2.5% to 15% in each year during 1990 to 2004-07 (About
financial crisis in USA, 2019).
In this financial crisis, different nations and markets included. Such as Asian countries and
markets named as China, Hong Kong, Japan and India.
Question 2. Impact of crisis on GDP of USA in long time span.
The financial crisis of year 2008, affected gross domestic product of USA in negative manner.
Due to this crisis country faced huge amount loss in terms of jobs, wealth and wages. The value
of homes in Australia fell down by $3.4 trillion during time period of July 2008 to March 2009.
In this crisis value of per household decreased by $30300 (About GDP growth rate in USA,
2019). As well as their GDP growth % was as follows during time period of 2007-2010:
Year GDP growth rate (in %)
2007 3.84%
2008 3.6%
2009 1.9%
2010 2.0%

In accordance of requirement of brief that if this crisis will remain for long time span then this
impact on GDP of USA will be as follows:
 Decreased consumption expenditures- If this crisis would have been remained for 10
years and they may face issue of decreased consumption expenses. This is so because in
the financial crisis, income per capita reduces and as a result consumption expenses also
decrease.
 As well as they may face problem of lower investment expenses because of lower income
level.
 Lower export- They would have been face this issue due to long run impact of financial
crisis. It is so because export depends on higher production and if production will be
lower than export rate will automatically fell down.
Question 3. Impact of crisis on inflation rate of USA in long time span.
Similar as gross domestic product rate, the inflation rate also impacted due to this financial
crisis. As a result, USA faced number of issues due to fluctuation in prices. Herein, underneath
inflation rate of USA during year 2007 to 2010 is mentioned that is as follows:
Year Inflation rate
2007 3.07%

2008 0.2%
2009 2.5%
2010 1.3%
This table shows that there is higher amount of fluctuation in the inflation rate of United State of
America. It is commonly known that if inflation rate is higher than this becomes difficult for
traders to conduct business activities. In addition, this variation in the inflation rate affected their
other financial functions such as lower demand as well as lack of supply of essential products
and services.
On the other side, if this crisis would have remained for long time frame then it may affect them
as discourage investment and savings. Along with this crisis may lead to shortage of needed
goods and services.
Question 4. Impact of crisis on labour market of USA in long time span.
The financial crisis of USA 2008, the labour market affected negatively. The unemployment rate
in the country raised by huge % during time phase of this crisis. About 30 million of people lost
their jobs as well as rate of unemployed become doubled in this time period. The household net
worth decreased by 18% whose amount was around $ 10 trillion ( About labour rate in USA,
2019 ). Though, this crisis did not affect to subgroups and people who were less educated they
affected badly. Below, unemployment rate of USA, during this crisis is mentioned in such
manner that is as follows:
Year Unemployment rate
2007 5.0%
2008 7.2%
2009 9.5%
2010 9.6%

The above presneted graph is showing that rate of unemloyement increased by a huge margin
with encompasses of years. The cause of this poor condition was that during this phase of cirisis
demand of products reduced and as a result companies were unable to retain employees.
Specially, those employees were terminated whose qualification was lower.
Apart from it, if this crisis would have remain for 10 years then condition may be more complex
for USA. This is so because any type of crisis is like a curse for each segment of nation and its
continuety may lead to negative results. In the context of labour market, this can be stated that
during long time frame they could have face higher unemployement rate of above 12%.
Question 5. Impact of crisis on consumption rate of USA in long time span.
This is expected that if above mentioned indicator of economy were affected negatively
then consumption rate was also lower during crisis of USA. This is so because consumption
expenditure is a key element of gross domestic product computation. If GDP was lower of USA
then automatically, consumption rate was also decreased during time period of 2007 to 2010. In
a nation, consumption rate on a particular entity depends on level of income as well as other
aspects of economy and this is commonly known that during crisis all indicators of economy gets
affected negative. Herein, underneath consumption rate of Americas’ during this time phase of
financial crisis is mentioned in such manner that is as follows:

Year Consumption (in terms of $)
2007 42.94 trillion
2008 47.12 trillion
2009 45.94 trillion
2010 49.26 trillion
This chart shows that there was fluctuation in the total amount of consumption in all four years.
The reason of this fluctuation was lack of funds and source of income.
In the long run, this financial crisis could have make more damages to economy of USA. It is so
because due to this crisis their consumption rate would have been decrease and as a result their
demand-supply might be mismatched.
Question 6. Impact of crisis on investment of USA in long time span.
The level of investment in a country depends on many factors such as income per capita,
GDP rate and many more. During financial crisis, these all factors gets affected in negative
manner. In the case of crisis in USA, the investment level was decreased in a significant
manner. This is so because level of spending in a country depends on earnings of
individuals.
Along with in the time period of crisis in USA, the foreign companies neglected to make
invest in their operations and activities. It is so because making investment in that time

period may lead to lower return or higher lose. As a result, during this time period of USA
investment spending decreased.
Question 7 Effect of crisis on USA government budget.
There is certain impact of financial crisis on USA overall budgets components such as:
Revenue: Revenue reforms after the last two recessions lower tax receipts, reaching 17.5 percent
of gross domestic product in the years prior up to the Great Depression.
Outlays: Expenditures as a share of the economy fell in the 1990s but in the 2000s changed their
path. These also rose to 24.4 percent of gross domestic product in 2009 owing to monetary
policy reactions to the Financial crisis.
Deficit: The decline in sales and the rise of expenditure across the period of the Financial crisis
generated unparalleled debts (for the post-war period). "The shortfall was 6.8 percent for the era
2008-13, for an estimate of 1.8 billion in the 2007. furthermore, the shortfall reached a peak in
2009, such as expenditure, is still high at the moment, but is expected to decline in the nearby
future.
Debt Held by the Public: In the second quarter of the 1990's, government borrowing as a
percentage of GDP reduced and remained fairly steady until around the Global financial crisis.
Nonetheless, the 2009-13 large expenditures more than increased the government debt.
Question 7 Ways to recover financial crisis
Economic recovery is a step throughout the economic cycle after a recession marked by a
long period of time of increase of commercial activity. Development in domestic product (GDP)
is strong during an economic expansion, but rises and falls as the market recovers. As a policy
maker in the USA government central banks certain steps can be made to overcome the financial
crisis. Such as:
Include emergency fund: In the financial condition or not, it is important to have an
emergency fund. Otherwise it is difficult to cover unexpected costs like sudden increase in the
raw material prices, diminishing level of output etc.
Do not procrastinate: In case there is financial issue or economy faces financial collapse,
it's crucial that plans are prepared instantly to avoid bigger losses. Many large and SMEs seem to
believe that staying away by their financial situation will enable them to surmount stress. In
addition, this can make the problem harder. But some company remember that situation of

recession could not be addressed immediately so they need to plan expenditures delicately and
make any kind of budgets in precise manner.
Opt for less volatile funds: These will be organized to restrict exchange volatility, and
match shareholders who are unable to face ups and downs, so far need a little visibility to equity.
Hybrid funding comes up in various flavours. Complex investment strategy or mixed benefit
funds allocate through debt and equity, increasing access from nil to 100 percent to either
category, based on the predominant valuations.
Avoid investing in property: This basically implies putting of money in real estate is no
longer a better option in the situation when economy just faces the biggest global financial crises.
When individual and business are searching for instant buying of property then they might drop
this plan and invest in some other sources that could deliver higher yields. At the time of
financial problems banks intend to increase the home loan rate and customer have to pay a higher
amount on specific loan amount. This could lead to increase in the expenditure amount which
might also exceeds the budgeted expense and increase the level of debts for customer as they
need money for other activity.
Diversify with gold, US funds: Diversifying the investments is often a great idea for
reducing the risk. Investors continue to rush to the protection of gold at times of turmoil this is
apparent in the dramatic rise of gold prices after the global crisis years. It is argued that
stakeholders must maintain about 10-15 for every cent of their gold investments. Shareholders
that had taken many visibilities to gold could have been partially cushioned from either the latest
stock market downturn.
Question 9. How USA can recover from expansionary gape.
In the case of expansionary gape, total output of a nation exceeds from expectations. As a
result, that country can face vital range of issues such as lack of demand, higher
expenditures and many more. In the aspect of financial crisis in USA, if they face this gape
then they may apply below mentioned remedies which are as follows:
 Limiting financial assistance to manufacturing entities- The main cause of
expansionary gape is the excess of output. In the context of USA, this issue can be
sort out if their government sets strict rules and regulation regards to financial
assistance. As a result, companies will not be able to produce more products and
this issue can be sorted out.

 Producing products in accordance of demand- Another way to overcome from
expansionary gape is to manufacturing of products as per the demand of market. It
will work for USA, because if there will be match between demand-supply.
Question 10. Steps to recover output gap in case of contractionary gap:
 The output gap reflects the disparity between the real GDP volume as well as its
expected future amount. It's typically calculated as a percentage of that same global
price volume. There is situation because of financial crises which leads to bigger
output gap in the economy there can be various ways to recover the output gap
which was faced by USA during the financial problems in 2007 to 2009. In the
context of USA crisis economist might modify the current fiscal policies which
would help in managing the money incurred on overall production activity. The
ways to make a better fiscal policy are discussed underneath:
 Countercyclical: Fiscal policy may be used to streamline the economic cycle.
That's also countercyclical diplomacy. During tough times, taxes are decreased but
investment is boosted to put money into business and customer hands; during good
times, revenue is decreased and taxes go up.
 Growth friendly: Tax and budget policies can be implemented to help the key
long-term economic development engines: infrastructure like machinery, bridges
and computers, labour and efficiency of worker that they generate each hour.
 Promote inclusion: Fiscal policies must also help individuals play an active role
in a globalised economy which respond to that. Greater access to education, jobs,
and medical services including social security will make it possible for people to
fully recover from such a loss of employment or sickness.

REFERENCES
Books and journal:
About financial crisis in USA, 2019 [online] available through:<
https://www.britannica.com/event/financial-crisis-of-2007-2008>
About GDP growth rate in USA, 2019 [online] available through:<
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=AU>
About consumption rate in USA, 2019 [online] available through:<
https://data.worldbank.org/indicator/NE.CON.TOTL.CD >
About labour rate in USA, 2019 [online] available through:<
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5959048/ >