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Growing Together

This overview explores the Great Recession through the lens of the 5 W's: Who, What, Where, When, and Why. It examines the key contributors to the crisis, such as the oil and food shocks, and the subprime mortgage crisis, along with their consequences on consumer spending and global markets. Furthermore, it evaluates government responses, including fiscal and monetary policies, and discusses prevention strategies to avoid future recessions by maintaining low unemployment, controlling inflation, and encouraging sustainable economic growth. ###

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Growing Together

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  1. Growing Together Vanessa Rodriguez

  2. 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

  3. How do we prevent another recession? • Figure out where things went wrong • Learn from our mistakes IN EVERY MISTAKE THERE IS A POTENTIAL FOR GROWTH

  4. WHO contributed to the development of the recession? • Oil Shock • Oil prices skyrocketed from ~$75 to ~$146 per barrel from 2007 to 2008

  5. WHO contributed to the development of the recession? • Food Shock • Food prices shot up from about $160 to $225 on the Food Price Index (FPI) from 2007 to 2008

  6. WHO contributed to the development of the recession? • Worldwide Financial Market Crisis • Subprime mortgage crisis • Lehman Brothers investment bank failure

  7. WHAT were the consequences? • Increase in oil and food prices • Led to consumer spending of other products to decrease C GDP GDP = C + I + G + NX

  8. WHAT were the consequences? • Subprime mortgage crisis led to an even further decrease in consumer spending as well as a decrease in business investments I + C GDP GDP = C + I + G + NX

  9. WHAT were the consequences? • Lehman Brothers investment bank failure led to a global banking panic C+ I + NXGDP GDP = C + I + G + NX

  10. WHAT were the consequences?

  11. WHAT were the consequences?

  12. 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 recession Source: Michael Roberts, The Trader (October 2012)

  13. 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 2010 Source: Carlo Cottarelli, Director of the Fiscal Affairs Department (January 2012)

  14. WHEN did these problems start emerging? • 1980’s: Reappraisal of regulations set forth after the Great Depression • From this date until 2007 many problems began to arise: • Banking deregulation • Household saving rates decreased • House price boom • 2007: Food and oil prices increased sharply over a short period of time of about one year

  15. WHY were these problems not prevented or stopped on time? Financial deregulation: • Policies were no longer necessary • Monetary policy was thought to prevent another recession • Policy reappraisal led to a healthy economy no signs of threat to the future economy were apparent Oil & Food shocks: • Similar events happened in the past and they corrected themselves • Economists ignored these issues and focused on alleviating other economic problems

  16. Response solutions to the crisis Governments gave financial support to their banks • FAILED to stimulate consumer & business spending temporary relief to banks Governments implemented fiscal policies • SUCCESS in the long run stimulated demand even though it increased public debt (i.e. government spending) Monetary policies by major central banks • FAILED in the short run did not ease the credit crisis

  17. How do we prevent another recession? • Unemployment rate low (i.e. full employment) • Low inflation (i.e. optimal inflation target) • Economic growth

  18. Keep AD constant Control: • Consumer spending • Business investments • Exports

  19. Generate budget surplus • Cut back on government spending decrease its impact on aggregate demand • Lowering 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

  20. Cut back on government spending Fiscal 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

  21. Cut back on government spending • Short run effect? • Decrease aggregate demand • Long run effect? • Create budget surplus from money saved • Prevent too high of an inflation rate • Keep equilibrium price at a level that does not negatively affect the economy

  22. Cut back on government spending

  23. Decrease income taxes • No more budget deficit • Increase 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

  24. Decrease income taxes • Short 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

  25. Decrease income taxes

  26. Decrease business taxes • Increase aggregate demand and business investment spending • By increasing firm investments, it will make up for the decreased government spending

  27. Decrease business taxes • Short 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 growth • Decrease unemployment demand for labor will increase as aggregate demand increases • Control inflation rate so that prices do not increase drastically

  28. Decrease business taxes

  29. Increase interest rates • Means to control the effect of business in the economy • Allows us (i.e. the government) to slow down economy to ease inflation • Goal: to reduce spending by making it harder and less desirable to acquire loans

  30. Increase interest rates • Long 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

  31. Increase interest rates

  32. Goal? To maintain a certain output (i.e. GDP) that is affected by: • Job growth • Optimal inflation rate • Overall economic growth.

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