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Chapter 12 The Recession of 2007-2009: Causes and Policy Responses Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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12-2 Chapter Outline The Economy Before 2007 Housing –How Much Is a House Really Worth? –Mortgages –How to Make a Bubble –Pop Goes the Bubble! The Effect on the Overall Economy The Response to the Recession Summary
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12-3 The Overall Economy Prior to the Recession
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12-4 Gas Prices
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12-5 Case Shiller Index of Housing
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12-6 Housing Starts
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12-7 Debt
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12-8 Fed-Funds Rate
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12-9 How to Make a Bubble Fundamental Determinants of Housing Value –Location –Amenities –Interest rate Non-Fundamental Determinants –Expectations that prices will rise in the future causing increased demand now. This is a prescription for a bubble.
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12-10 Vocabulary of 2008 Securitization: The process by which mortgages are bundled into groups and sold as investment instruments. –Done by Fannie Mae and Freddie Mac –Geographically diversity Credit Default Swap –Insurance against the loss of principal –Unregulated –ING AIG were large purveyors as were many investment banks Goldman Sachs Lehman Bros
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12-11 Fed Funds Rate
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12-12 GDP Drops
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12-13 Unemployment Rises
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12-14 Job Losses
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12-15 AS-AD Model AS PI RGDP AD 1 RGDP* PI* AD 2 Shock
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12-16 Obama Stimulus Plan
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12-17 AS-AD Model: Assist Nondiscretionary Fiscal Policy Through States AS PI RGDP AD 1 RGDP* PI* AD 2 Shock AD 3 NDFP
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12-18 AS-AD Model: Discretionary Fiscal Policy AS PI RGDP AD 1 RGDP* PI* AD 2 Shock AD 3 DFP NDFP
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12-19 Plan Elements: Tax Cuts
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12-20 Plan Elements: Medicaid, Unemployment Extensions, Health Insurance
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12-21 Plan Elements: Spending on Projects
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