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Macroeconomic Issues 2007-2009 The Great Recession: GDP begins to drop Shaded area = recession Employment falls Unemployment Rises The Stock Market Plummets The beginnings of the great recession • High risk (“sub-prime”) mortgages became more common over past decade – Low down-payments; – Poor credit histories • Mortgage default rates rise in 2008 because – Housing prices fell – Adjustable rate mortgages “reset” – Worsening economic conditions • 5.2 million homeowners predicted to lose their homes between 2008 & 2010 The Financial Crisis of 2008 • Financial institutions experience significant losses due to defaults on mortgages. – Several failing financial institutions either acquired by others or go bankrupt. • Federal Reserve and U.S. government extend aid to financial institutions – Fed lends money to banks – October 2008: Federal government establishes $700 billion TARP (troubled asset relief program) • Stock market drops nearly 50% in 2008 • Difficult for business to borrow • Consumers cut back on spending Government attempts to stimulate the economy • Feb 2008: Economic Recovery Act – Approval of $168 billion stimulus package – Tax rebates to 130 million households • $600 for single • $1200 for married – “booster shot” for the U.S. economy Government attempts to stimulate the economy • American Recovery and Reinvestment Act passed in February 2009 – $288 b. in tax cuts and benefits • Housing,, cash-for-clunkers, etc. – $224 b. for education, health care, and entitlement programs • Health insurance for unemployed, extended unemployment benefits, etc. – $275 b. for federal contracts, grants and loans • Support to states, roads, etc. On-going concerns: the deficit The decline in the value of $ Other issues • Will economy have a “double dip”? • Will inflation be a problem in future? • How long before unemployment drops to previous levels? • Can government balance budget?