Recession Essay

465 Words2 Pages
How did the recession started? The financial crisis started because banks were able to create too much money, too quickly, and used it to push up house prices and speculate on financial markets. Response of the Fed and U.S.A Government The Fed kept interest rates low after the 2001 recession. This policy promoted the recovery but this also encouraged households to borrow and buy housing. Since interest rates were too low for too long, the Fed contributed to the housing bubble that lead to this financial crisis. Policymakers encourage homeownership. Some policies included the tax deductible of mortgage interest. The government sponsored enterprises that promoted mortgage lending. Some household with shaky finances should have been better of renting. Was the response of the Fed and the US government was appropriate and how that might impact markets across the world? The US government and Fed responded and tried to counter the recession by buying back the government bonds they had already issued. This response impacted the LM curve and lowered the interest rate and increased GDP (via increase in investments). What should our response be? At the time, the US is a Large-open Economy with flexible exchange rates; its IS curve is a function (Y=C+I+G+NX) and the LM curve is a function (M/P).The goal we are aiming for is to reduce unemployment, increase output, increase consumption, and increase Investments. To begin, we would want to shift the LM curve to the right to increase the output; the increase would come as a result of buy back government issued bonds which would increase the Ms . To reach equilibrium, there is a downward movement (not a shift) on the IS curve; this causes the interest rate to be lower, and due to the negative relation they have Investments then increase. To increase Consumption, we acknowledge that Consumption (C) = c(Y-T). To

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