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The great recession

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December 2007 - June 2009: the longest recession since WWll. longer length than other recessions, deeper in effect. problems with AD and AS

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important part of the great recession is that there was a shock to

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OIL PRICES

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Dodd-frank act

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is the primary regulatory response to the financial turmoil that contributed to the great recession

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the great depression

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most significant factor was a large and persistent decline in aggregate demand

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macroeconomic policy

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encompasses government acts to influence the macroeconomy

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much of the depression was caused by what?

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faulty macroeconomic policy

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fiscal policy

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comprises the use of governments budget tools, government spending and taxes to influence the macroeconomy

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monetary policy

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involves adjusting the money supply to influence the macroeconomy

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classical economics

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stress the importance of aggregate supply and generally believe that the economy can adjust back to full employment equilibrium on its own (pro market, Laissez faire)

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Keynesian economists

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stress the importance of aggregate demand and generally believe that the economy needs help in moving back to full employment equilibrium

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classical economics characteristics

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long run, prices are flexible, savings are crucial to growth, key side of market is supply, market tendency stability, full employment, government intervention is not necessary

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keynesian economics characteristics

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short run, prices are sticky, savings are a drain on demand, side of market demand, market tendency instability, cyclical unemployment, government intervention is essential

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One similarity between the Great Recession and the Great Depression is that, in both episodes:

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there were significant problems in financial markets

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Which of the following best summarizes the main causes of the Great Recession?

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The collapse of housing prices led to decreased wealth and significant problems in financial markets, as well as a decrease in expected income and a stock market collapse.

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During the Great Recession, a major financial crisis followed the collapse of housing prices, which led to:

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the decline in the health of many large financial firms and banks.

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As a result of aggregate demand and long-run aggregate supply decreasing, we can see that the price level _________ and real gross domestic product (GDP) _________.

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remained unchanged; decreased

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The decline in housing prices contributed to the Great Recession, as depicted in the graph, in that:

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it caused a decrease in household wealth and created a crisis in the loanable funds market.

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During the Great Recession, aggregate demand ________ and long-run aggregate supply ________.

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decreased; decreased

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A decline in U.S. wealth would tend to cause:

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aggregate demand to decrease

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Which of the following best summarizes the main causes of the Great Depression?

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A stock market crash led to a decrease in expected income and tight monetary policy. Higher tax rates and a banking crisis then drove the economy into a depression.

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In comparison with other recessions, the Great Depression:

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had much larger changes in stock prices.

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The Great Depression lasted longer and was deeper than the average recession, in part, because:

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there was a stock market crash at the beginning of the depression.

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During the Great Depression, a major financial crisis followed the collapse of the stock market, which led to:

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the failure of many banks.

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During the Great Depression, the aggregate price level and real gross domestic product (GDP) both decreased, as depicted in the graph. Unemployment increased to record levels. Which of following best explains why this happened?

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A stock market crash, large numbers of bank failures, an increase in tax rates, and a tight money supply caused a recession.

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During the Great Depression, thousands of U.S. banks failed. As a result:

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aggregate demand decreased.

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The Great Depression is characterized by a decrease in aggregate demand. Of the following factors, which would have caused aggregate demand to decrease?

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a decrease in expected future income

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When considering how the economy works, classical economists hold that:

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the long run is more significant than the short run

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If asked about the basic functioning of the economy, a classical economist would claim that:

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the market tends toward stability and full employment.

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The graph shows a decrease in the price level due to a decrease in aggregate demand. Real gross domestic product (GDP), however, does not change. The best explanation for the events depicted on this graph is that:

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the economy quickly adjusts to changes in aggregate demand and remains at full employment.

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Keynesian economists believe that prolonged recessions are possible because:

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prices are sticky and do not adjust quickly during economic downturns.

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Which of the following policy statements would a Keynesian economist tend to support?

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The government should intervene in the economy to promote full employment.

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Keynesian economists believe that the economy is unstable and tends toward cyclical unemployment because:

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prices are sticky and prevent the economy from adjusting to full employment.

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suppose there is a housing bubble. what is the most important characteristic of a house to buyers who are contributing to the housing bubble?

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whether they can sell the house for a higher price than they bought it

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before the great recession began, the house price index _____ and the house construction index _____

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fell; fell

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starting from the textbooks analysis of the great recession, all of the following make it more realistic except

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accounting for the end of the housing bubble

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what was one of the main catalysts of the great recession, which began in December 2007?

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failling real estate prices

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what is true about the magnitude of the great depression

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unemployment reached a level of 25%

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the great depression led to the creation of what school of thought in economics?

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Keynesian

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classical economists will generally focus on policies that will

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emphasize increasing the LRAS

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What is the main reason Keynes believed that the economy won't return to equilibrium

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sticky wages

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