Financial Crisis

Discussion Question Response

Between 2007 and 2009, the United States experienced a severe financial crisis and economic downturn commonly known as the Great Recession. Starting in 2006, housing values fell 30%, causing losses in mortgage-backed securities for families and financial institutions. The recession was marked by a drop in aggregate demand that caused a decline in GDP and an increase in unemployment.

In your initial post, draw or find an example of an aggregate demand and aggregate supply (AD/AS) model that illustrates the general trends of the U.S. economy during the Great Recession. (The example may be from your own research or from the textbook.) In addition to your image, provide a response to the following:

How did the AD/AS equilibrium change over time? Support your claims by referring to your AD/AS model.

Select an economic factor (GDP, unemployment, price level) and explain what impact any shifts in AD or AS (or both) had on your chosen factor.

Note: Use the Insert Image button in the discussion menu to attach your image. Review the following resources for help taking a screenshot:

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In your response posts, comment on at least two posts from peers who chose different factors than you did. Explain how the economic factors are related. Share a news article that presents a different perspective on the economic outcomes of the Great Recession from your peers’ perspectives.

 

Kyle Mendoza – The AD AS model can show us fluctuations in the economy. “The aggregate-demand curve shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level. The aggregate-supply curve shows the quantity of goods and services that firms produce and sell at each price level.” (Mankiw,2021) When we want to look at overall level of prices, we look at the vertical axis and when we want to know about the economy’s total output of goods and services, we look at the horizontal axis.

 

One of the biggest fluctuations to ever happen in U.S. history is the Great Depression. This fluctuation was due to goods and services plummeting. The Great Depression “is by far the largest economic downturn in U.S. history. Real GDP fell by percent from 1929 to 1933, and unemployment rose from percent to percent.” (Mankiw, 2021). A smaller version of a depression is a Recession. The Great Recession was a financial crisis due to inadequate regulation on high risk loans and government policy. From 2006-2009, house prices fell 30% nationwide and there was a rise in unemployment. In the AD/AS model during the recession we can mostly notice how there is a large shift in the aggregate demand curve. “The supply and demand curves also attest to this, since a leftward shift in the demand curve will result in lower equilibrium price and demand levels, where supply and demand meet.” (Chron,2021)

 

 

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Susanna Devi – The AD-AS model is a way for us to understand business cycles. “Recessions occur as a result of negative demand or supply shocks, which cause the equilibrium level of real GDP to fall substantially below potential GDP.” (“Business Cycles and Growth in the AD–AS Model | Macroeconomics”, 2021).

The AD equilibrium changed over time during the Great Recession with a downward shift to the left. This created a new equilibrium with a lower price and lower output quantity as can be seen in the Model 1.

In an AD/AS diagram two forms of unemployment can be measured, cyclical unemployment and natural rate of unemployment. The natural rate of unemployment is not shown separately in the AD/AS model, but it is included in the determinants for GDP or full-employment GDP (Academy, 2021). Natural unemployment results from real or voluntary economic circumstance, such as people being unemployed due to labor force structure, for instance, being replaced by technology or not having the skills needed to be hired.  The AD/AS diagram does show cyclical unemployment. Cyclical unemployment is the result of an “upturn or downturn” in economic shifts. (Potters, 2021). During a recession unemployment generally increases. “Relatively low cyclical unemployment for an economy occurs when the level of output is close to potential and high cyclical unemployment arises when the output is substantially to the left of potential GDP on the AD/AS diagram.” (Academy, 2021). The Great Recession started in December 2007 and ended in June 2009 with a peak unemployment rate of 10.0%. The 10% unemployment rate is relatively low in comparison to the current pandemic situation we are in, where unemployment rates reached 14.8% in April 2020, but nowhere close to the unemployment rates during the Great Depression, which was at 24.9%.

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