Lecture 10 – The Great Recession

The Great Recession (Dec. 2007 – June 2009)

I. The Great Recession: AD & AS Graph

The Great Recession is analyzed using an Aggregate Demand (AD) and Aggregate Supply (AS) graph.

• Axes:
  • Y-axis: Price level (GDP price index, 2009 = 100)
  • X-axis: Real GDP (trillions of 2009 dollars)
• Curves:
  • AD_{08}: Aggregate Demand in 2008
  • AD_{09}: Aggregate Demand in 2009 (shifted to the left, indicating decreased demand)
  • AS_{08}: Aggregate Supply in 2008
  • AS_{09}: Aggregate Supply in 2009
• Potential GDP: The potential GDP is illustrated as a vertical line.
• Recessionary Gap: The graph depicts a recessionary gap in 2009, showing that the actual GDP is below the potential GDP. The values on the x-axis are as follows: 13.0, 13.5, 14.4, 15.4, 16.0, 16.5

II. Financial Crises

1. Reinhart & Rogoff Study

• A study by Reinhart and Rogoff analyzes financial crises over the past 150 years.

2. Lessons: Average Financial Crises vs. the Great Recession

• The Great Recession is compared to the average financial crisis to highlight its unique features and severity.

III. The Great Recession Features:

1. Leveraging

• Excessive leveraging played a significant role in the crisis.

2. The Housing Bubble

• The housing bubble and its subsequent burst contributed significantly to the recession.

3. Banking Collapse

• The collapse of major banking institutions exacerbated the economic downturn.

4. Government Bailout: TBTF & TITF

• The government implemented bailout programs to rescue institutions that were "Too Big To Fail" (TBTF) or "Too Important To Fail" (TITF).
• The Big Short - Reference to the movie *