2003 Tax Rebate

							  12
                THE RECESSION OF 2007-2009: CAUSES
                AND POLICY RESPONSES
________________________________________________________________________


DISCUSSION QUESTIONS

1. What was the twenty-year average rate of growth in real GDP prior to the last quarter of 2007?

2. Why did real GDP continue to increase despite the nearly doubling of gasoline prices in 2007?

3. What two distinct booms were fueled by the housing boom leading up to the 2007-2009 recession ?

4. What concerned the Federal Reserve during the run up in energy prices and increases in consumer spending on
   new houses and other items, and what did the Fed do in response to their concerns?

5. What did the Bush administration do in the early stages of the recession (2008) to stimulate the economy?

6. What was the outcome of the Bush Administration’s efforts to stimulate the economy?

7. What significant event occurred in the credit markets on September 7, 2008 and what other credit market events
   quickly followed?

8. What two fiscal policies were embraced by the Obama Administration’s stimulus package?




THE WEB-BASED QUESTION --- kick it up a notch

There are many web sites dealing with the 2007-2009 recession. One of the more interesting sites, from an
economics perspective, is recession.org (http://recession.org/ ), where you can find a tremendous amount of
information.

Part I

All of use, especially you as a student of economics, should be interested in how to protect ourselves from the
inevitable recessions that lay ahead. Visit http://recession.org/library/recession-proof-your-job and summarize what
people can do to recession proof their jobs.
2     Chapter 12



Part II

Visit the economic forum (http://oureconomy.org/ ) at recession.org and explore postings by others in one or more
of the areas that interest you. Copy and paste some of the more interesting postings into your answer for this
question. Also, feel free to post comments of your own.


ANSWERS TO STUDY QUESTIONS

SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS

1. The twenty-year average rate of growth in real GDP prior to the last quarter of 2007 was 2.7% per year..

2. In short, the answer is housing. Because lenders were eager to make home mortgage loans (first and second
   mortgages) and housing prices were appreciating, the resulting exceptionally high growth in house prices fueled
   economic growth during the first three quarters of 2007, despite the nearly doubling in gasoline prices.

3. The availability of credit secured by housing fueled new house construction and home equity lines of credit.
   People found large, new houses very affordable due to favorable lending terms, so they purchased the large,
   new houses. Those who did not buy a new house, found the value of their existing house increasing rapidly, so
   they tapped into the equity created by the escalating house values using home equity lines of credit to buy other
   consumer goods, such as new cars, new flat screen TVs, etc.

4. The Fed was concerned that the increase in energy prices and consumer purchases would fuel inflation. The
   Fed responded to this concern by increasing the Federal Funds Rate from 1% in June, 2004 to 5 ¼% in June,
   2006 in an effort to head off inflation by reducing the money supply. .

5. The Bush Administration lobbied to make the tax cuts of 2003 permanent and to provide a tax rebate to
   taxpayers. Its attempt to make the 2003 tax cuts permanent failed, but congress did enact a tax rebate plan that
   sent checks for $600 and $1,200 to single and married tax payers, respectively. .

6. The outcome of the Bush Administration’s efforts to stimulate the economy (see answer to question 2 above),
   was a short-term increase in economic growth, despite the underlying weakness of the economy.

7. The Treasury Department placed Fannie Mae and Freddie Mac (see Chapter 11) into conservatorship, because
   they were essentially bankrupt. Within a week, Lehman Brothers filed for bankruptcy, and two days later, the
   Fed lent AIG $85 billion. Two weeks later, the Bush Administration asked Congress for $700 billion for its
   Troubled Asset Relief Program. Another two weeks later, Wachovia, on the verge of bankruptcy, was
   purchased, with Fed assistance, by Wells Fargo. Within the span of two months, the financial system was on
   the verge of collapse.

8. The Obama stimulus package includes greater funding of nondiscretionary fiscal policy as well as funding of
   some discretionary fiscal policy programs.
                                                           The Recession of 2007-2009: Causes and Policy Responses   3




SUGGESTED ANSWER TO THE WEB-BASED QUESTION


Part I.
          Save up at least three (preferably six) months of expenses
          Know what your living expenses are
          Perform 120% of what you are required to do at work
          Be prepared to be laid off (keep resume updated, keep network of contacts updated, etc.)
          Don’t panic; think long term (that’s what the three to six months savings are for)
          Be nice, professional, and cooperative at work (being a 120% worker helps)

Part II.

Answers from students will vary. As the instructor, you might ask students to share their answers with the entire
   class electronically.