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Kiszállításkor fizetve
THE RECESSION OF 2001
Unemployment rate rose from 3.9 percent in December 2000 to 4.9 percent in August 2001 and to 6.3 percent in June 2003. The unemployment rate then began to decline. By January 2005, unemployment had fallen back to 5.2 percent. What caused the recession, and what ended it? The answer to both questions is shifts in aggregate demand.
The recession began with the end of the dot-com bubble in the stock market. During the 1990s, many stock-market investors became optimistic about information
technology, and they bid up stock prices, particularly of high-tech companies. With hindsight, it is fair to say that this optimism was excessive. Eventually, the optimism faded, and stock prices fell by about 25 percent from August 2000 to August 2001. The fall in the stock market reduced household wealth, which in turn reduced consumer spending. In addition, when the new technologies started to appear less profitable than they had originally seemed, investment spending fell. The aggregate-demand curve shifted to the left.
The third event that put downward pressure on aggregate demand was a series of corporate
accounting scandals. During 2001 and 2002, several major corporations, including Enron and World Com, were found to have misled the public about their profitability. When the truth became known, the value of their stock plummeted. Even honest companies experienced stock declines, as stock-market investors became less trustful of all accounting data. This fall in the stock market further depressed aggregate demand.
Policymakers were quick to respond to these events. As soon as the economic slowdown became apparent, the Federal Reserve pursued expansionary monetary policy. Money growth accelerated, and interest rates fell. The federal funds rate (the interest rate on loans between banks that the Fed uses as its short-term policy target) fell from 6.5 percent in December 2000 to 1.0 percent in June 2003. Lower interest rates stimulated spending by reducing the cost of borrowing. At the same time, with the president’s urging, Congress passed a tax cut in 2001, including an immediate tax rebate, and another tax cut in 2003 .. One goal of these tax cuts was to stimulate consumer and investment spending. Interest-rate cuts and tax cuts both shifted the aggregate-demand curve to the right, offsetting the three contraction shocks the economy had experienced.
The recession of 2001 is a reminder of the many kinds of events that can influence aggregate demand and, thus, the direction of the economy.
(in Aggregate Demand and Aggregate Supply / by Brianna)
Questions based on the Case Study
1. The rapid rise in unemployment rate witnessed in the US economy (between December 2000 & June 2003 ) refers to a specific type of unemployment.
Deduce the type of unemployment that was being faced by the nation and correlate it to the general economic conditions existing at the time in USA, as described in the above case. Explain
2. Analyze in detail the three important causes of a decrease in Aggregate Demand that are outlined in the case.
3. (a) Evaluate the monetary and fiscal policies used by the US Government to overcome the recession of 2001.
(b) Assess the effectiveness of these government policies in terms of their success/failure in achieving the intended objectives.
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