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Growing Together. Vanessa Rodriguez. Overview. The 5 W’s of the Great Recession The Who, What, Where, When, and Why Response solutions to the crisis Prevention policies to avoid a relapse. How do we prevent another recession?. Figure out where things went wrong Learn from our mistakes. - PowerPoint PPT Presentation
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Growing TogetherVanessa Rodriguez
OverviewThe 5 W’s of the Great Recession
The Who, What, Where, When, and WhyResponse solutions to the crisisPrevention policies to avoid a relapse
How do we prevent another recession?
1. Figure out where things went wrong
2. Learn from our mistakes
IN EVERYMISTAKE
THERE IS A POTENTIAL
FOR GROWTH
WHO contributed to the development of the recession?1. Oil Shock
Oil prices skyrocketed from ~$75 to ~$146 per barrel from 2007 to 2008
WHO contributed to the development of the recession?2. Food Shock
Food prices shot up from about $160 to $225 on the Food Price Index (FPI) from 2007 to 2008
WHO contributed to the development of the recession?3. Worldwide Financial Market Crisis
Subprime mortgage crisisLehman Brothers investment bank failure
WHAT were the consequences?1. Increase in oil and food prices
Led to consumer spending of other products to decrease
C GDPGDP = C + I + G + NX
WHAT were the consequences?2. Subprime mortgage crisis led to an even further
decrease in consumer spending as well as a decrease in business investments
I + C GDPGDP = C + I + G + NX
WHAT were the consequences?3. Lehman Brothers investment bank failure led to
a global banking panic
GDP = C + I + G + NX
C + I + NX GDP
WHAT were the consequences?
WHAT were the consequences?
WHERE did the crisis affect?All regions and countries were affected by the crisis “Great Recession”
Figure 3: Real GDP growth in foreign countries prior to the recessionSource: Michael Roberts, The Trader (October 2012)
WHERE did the crisis affect?Public debt AFTER the recession of various developed countries
Figure 4: General government debt of developed countries due to the recession in 2010Source: Carlo Cottarelli, Director of the Fiscal Affairs Department (January 2012)
WHEN did these problems start emerging?1980’s: Reappraisal of regulations set forth after
the Great DepressionFrom this date until 2007 many problems began to
arise:1. Banking deregulation2. Household saving rates decreased3. House price boom
2007: Food and oil prices increased sharply over a short period of time of about one year
WHY were these problems not prevented or stopped on time?Financial deregulation:
Policies were no longer necessaryMonetary policy was thought to prevent another
recessionPolicy reappraisal led to a healthy economy no
signs of threat to the future economy were apparentOil & Food shocks:
Similar events happened in the past and they corrected themselves
Economists ignored these issues and focused on alleviating other economic problems
Response solutions to the crisisGovernments gave financial support to their banks
FAILED to stimulate consumer & business spending temporary relief to banks
Governments implemented fiscal policiesSUCCESS in the long run stimulated demand even
though it increased public debt (i.e. government spending)
Monetary policies by major central banksFAILED in the short run did not ease the credit crisis
How do we prevent another recession?1) Unemployment rate low (i.e. full
employment)2) Low inflation (i.e. optimal inflation target)3) Economic growth
Keep AD constantControl:Consumer spendingBusiness investmentsExports
Generate budget surplusCut back on government spending decrease its
impact on aggregate demandLowering taxes budget deficit has already been
relieved through higher taxes implemented after recession
Decreasing business taxes increase aggregate demand
Increasing interest rates slow down economy to ease inflation
Cut back on government spendingFiscal policy to decrease government spending:(short-term)Decrease aggregate demand in the short run
Reduce budget deficit in order to create budget surplus
Shift down AD-AS equilibrium to decrease equilibrium price and quantity to a healthy state Prevent high inflation rate
Cut back on government spendingShort run effect?
Decrease aggregate demandLong run effect?
Create budget surplus from money savedPrevent too high of an inflation rate
Keep equilibrium price at a level that does not negatively affect the economy
Cut back on government spending
Decrease income taxesNo more budget deficitIncrease household disposable income
Increase consumer spending
Increased consumer spending will make up for the decreased government spending We will still see an increase in tax revenue to
generate budget surplus
Decrease income taxesShort run effect?
Increase disposable income drive up consumer demand which accounts for most of the total demand
Long run effect?Natural economic growth
Now that government spending will decrease this will allow the economy to naturally continue to stay stable
Decrease income taxes
Decrease business taxesIncrease aggregate demand and business
investment spendingBy increasing firm investments, it will make up for
the decreased government spending
Decrease business taxesShort run effect?
Increase business investment increase aggregate demand by decreasing labor supply curve Equilibrium price will be lower
Long run effect?Continue increase in economic growthDecrease unemployment demand for labor will
increase as aggregate demand increasesControl inflation rate so that prices do not increase
drastically
Decrease business taxes
Increase interest ratesMeans to control the effect of business in the
economyAllows us (i.e. the government) to slow down
economy to ease inflationGoal: to reduce spending by making it harder and
less desirable to acquire loans
Increase interest ratesLong run effect?
During high-growth periods this will attempt to slow down the economy
Aids in controlling inflation rate as spending will be reduced due to it being more expensive for individuals to obtain loans
Will prevent another housing boom keep real estate prices at a sensible level
Increase interest rates
Goal?To maintain a certain output (i.e. GDP) that is affected by:1. Job growth2. Optimal inflation rate3. Overall economic growth.