1. How did the global economic crisis unfold? It began during the 1990s when the American economy grew by almost 33% but changed for the worse in 2000 after the dot-com bubble burst & then after the 9/11 attacks in 2001. This created a stock market drop & a rise in unemployment. In effort to avert recession, the Federal Reserve dropped interest rates dramatically. Once interest rates dropped the economy was overflowing with money which lead lenders to be able to provide mortgage loans to, previously, undesirable borrowers. Now the demand for houses rose & so did the prices for the houses making these subprime loans attractive to lenders because of the high return. So the Banks & investment houses continued to invest in mortgage securities but the financial institutions did not maintain enough reserves in case the housing market crashed. Naturally, the housing market came crashing down leaving borrowers “upside down” in their loans & they were forced to foreclose. When this happened, the banks became unwilling to lend money so funds were not available for businesses. Without funds for everyday operations, businesses struggled causing layoffs & raising the unemployment rate.

2. What steps did the Federal government and the Federal Reserve take to mitigate the crisis? The Federal Reserve bailed out Bear Stearns & AIG. The U.S. Department of the Treasury seized Fannie Mae & Freddie Mac. Congress passes the economic bailout plan TARP which spent $700 billion investing in banks & bailing out the auto industry. Congress also passed an $825 billion economic stimulus package called the American Recovery & Reinvestment Act which included cutting taxes, building infrastructure, & investing in green energy.

3. Compare and contrast microeconomics and macroeconomics. How do the two approaches interrelate? Microeconomics is the study of small economic units such as individual consumers, families, & individual businesses whereas macroeconomics studies a country’s overall economic dynamic such as the employment rate, the GDP, & taxation policies. Use a specific example to explain. Macroeconomics controls how much money you bring home & microeconomics controls how much you can buy.

4. What is the difference between fiscal and monetary policy? Fiscal policy is the government effort to influence the economy through taxation & spending whereas, monetary policy refers to the Federal Reserve’s influence of interest rate changes & the supply of money. What role does politics play in shaping these policies? Politics can make taxes higher & influence interest rates.

5. What are the fundamental elements of the free market economic system? The fundamental elements of the free market system are: the rights to own a business and keep after-tax profits, the right to private property, the right to free choice, and the right to fair competition. How can businesses thrive within this system? Businesses can thrive in a free market economy by getting to keep their profits after taxes & having the freedom to do what they want.