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Great Recession Of 2008 Essay

1327 Words6 Pages

A combination of factors created the Great Recession of 2008. The housing market crash in the United States, which a housing bubble, the overinflation of housing prices brought on by a rise in demand for houses, bursting caused. Prior to the bubble bursting, money lenders were eager to provide loans to borrowers who could not afford them because investors and lenders believed that the interest rate, the outstanding balance of a mortgage, would provide a better return than investing in something else. This eagerness to provide loans led to an increase in subprime lending, taking advantage of the lax lending policies. This led to the creation of mortgage-backed securities, securitizing mortgages by bundling thousands of individual mortgages and …show more content…

The Federal Reserve lowered interest rates to near-zero levels and implementing the Quantitative Easing (QE) programs, which also played a crucial role in stabilizing the economy because the Federal Reserve purchased sizable amounts of government bonds and mortgage-backed securities to increase money supply in the economy. These policies encouraged borrowing, increased liquidity in the financial sector, and increased the money supply in the economy. By lowering interest rates to near-zero levels, the Federal Reserve increases aggregate demand through several means. For instance, it makes borrowing cheaper for households and businesses, increasing their spending and investment. Additionally, it reduces the cost of goods and services, which stimulates consumption. All these factors shift the AD curve to the right, leading to higher output and prices. Controversially, lowering interest rates also has an impact on the AS curve, as it leads to higher inflationary pressures and wage demands, an outcome economists wish to avoid during a recession.
Theoretically, lowering interest rates to near-zero levels can help stimulate the economy by making it easier for consumers and business to borrow money, which can lead to increased spending and investment. However, in practice, the impact of such monetary policies can be more complicated because outside factors can limit their effectiveness. For example, if households and businesses lacked confidence in banks and other financial institutions, or if lenders were hesitant to lend money despite the lower interest rates, then the impact this monetary policy has on economic growth may be

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