econsalon: Macro Question 3/2/11

econsalon: Macro Question 3/2/11: "Consider the most recent recession which authorities say began in December 2007. Review the list of real shocks and spending shocks reviewe..."

The most recent recession begun in December of 2007 most certainly can be blamed on a shift (negative) in the rate of spending. Lower spending, consumer fear, and reduced wealth, all results from the ripple effects of the housing/credit market crash, which literally froze the nation's financial system. These negative spending shocks affect the dynamic aggregate demand curve in the RBC, pushing it down and to the left. This negative shift of the AD curve will cause a gap in real GDP growth to potential GDP growth, causing the recession and unemployment. Though some real shocks (productivity shocks that can shift the Solow curve) can be a source of argument for the downturn of the economy, these shocks do not compare to the damage the housing crisis did to the rate of spending. Examples are the wars in Iraq and Afghanistan, and the shift from Iraq to Afghanistan in 2008-2010. But the pull-out (not complete) from Iraq cannot be seen as "less" war, since actual operations in Afghanistan ramped and increased. Also, government spending in war actually increases spending growth, so that argument has some problems in justifying the cause for economic down- turn. So, the quick and negative shift in the AD curve from a shift in lower spending growth (caused by housing crash) is the main reason for the economic downturn in 2007.