Economic Booms and Recessions in the USA: A Comprehensive Analysis

This report analyzes the US economy, focusing on economic booms and recessions, and the application of Keynesian economics. It examines the potential GDP and aggregate supply models to understand economic growth and downturns. The analysis includes the impact of the 2008-2009 financial c...Read More

Running Head: ECONOMIC TUMBLES IN USA
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THE ECONOMIC BOOMS AND RECESSION IN USA

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The US economy is currently operating under the Neoclassical Perspective and
Aggregate Supply. Economic growth has gone down below its potential in the past and at times
it also went above the potential (Granovetter, 2014). The recession that occurred in the year
2008and 2009 in the US made the economy to tumble into recessions and this has made it to
remain below its potential to date. Sometimes back in 1990s, the economy was at a potential
GDP. Most of the economic recessions and upswings occur when the economy is running
between 1-3% of either below or above the potential level of GDP (Granovetter, 2014). The
potential GDP determines the size of the economy and it is represented in the figure below.

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In an aggregate supply model, the potential GDP is represented by a vertical line. The
long run AG supply curve is used to show the potential GDP as shown in the above diagram. The
LRAS curve is used to show the level of potential GDP of the economy no matter the position of
the aggregate demand (Granovetter, 2014). Increase in the amount of human capital, physical
capital and the advancement in technology will shift the potential GDP and the vertical long run
average supply curve to the right. The increase in GDP is described as economic growth.
Following the worldwide monetary crisis of 2007-08, there was a global interest in
Keynesian economics among economists and the policy makers (Keynes, 2016). The latter
included discussions and implementation of the policies in accordance with the
recommendations that were made by Maynard Keynes concerning the first stimulus and the
fiscal policy (Keynes, 2016). Generally, the Keynesian economics was for the idea that the
macro economy can be in recession for a given period of time. The Keynesian economics called
for government intervention to aid in overcoming the shortage of AD to lower the rates of
unemployment and lead to increased growth (Keynes, 2016).

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References
Granovetter, M. (2014). Economic action and social structure:The problem of embeddedness. American
journal of sociology, 47(2), 45-53.
Keynes, J. M. (2016). General theory of employment, interest and money. Atlantic Publishers & Dist.