Question

During the recession of 2007-2009, the U.S. economy was experiencing a decrease in home prices and consumer wealth, a credit crisis in the financial markets, and declining consumer and business confidence. a. What components of aggregate demand were affected and what was the impact on real output? b. What were the policy options?

Answer 1

Answer:Answer The business sector (b)The policy option is the fiscal policy

Explanation:

Recession can be defined as a state of economic declines in a country which in turn lead to decline in the GDP of a country as well as increase in the rate of unemployment in the country. It is a period of slow business activities in the country which can last for period of six months or a year depending on the quick response of the handlers of the economy to quickly put the situation under control. It is a period of slow growth in the economy. In a period of recession, the business sector experience lack of credit facility which arise due to the inability of the banking sector of the economy to lend to the business sector.. during these period there is a decrease in consumer spending, in the sense that, the demand for goods and services by the households will reduced drastically as a result of the reduction in the purchasing power of the people.

However, with a view to bring the economy under control, the policy option to be adopted is the fiscal policy in which the government can increase their spending on the economy, The fiscal policy also includes the reduction of the income tax as a way of increasing the purchasing power of the people. In addition, The banking sector will also be encouraged to start lending to the business sector as a way of boosting the economy and bring back the economy to the path of growth.