Macroeconomics Focuses On The Economy

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Macroeconomics focuses on the behavior of the economy as a whole, and in the housing market the law of supply and demand is prominent. Between 2007 and 2009 the United States experienced such an economic downturn that is known as, “the Great Recession” (Investopedia, n.d.). One of the causes to this recession was the housing bubble burst in 2006, as home prices began to level off; homeowners began defaulting on their mortgage payments and in larger numbers in 2007 when the major collapse happened. This caused a decrease in demand for properties, creating an oversupply of houses and decreasing property prices across the United States. Not only did the demand for properties decease, so did the consumer spending. Retail spending dropped 8 percent from 2007-2009 (Mian & Sufi, n.d.). The Federal Reserve’s response to the crisis evolved over time and took a number of nontraditional avenues. Initially, the Fed employed “traditional” policy actions by reducing the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with much of the reduction occurring in January to March 2008 and in September to December 2008. The sharp reduction in those periods reflected a marked downgrade in the economic outlook and the increased downside risks to both output and inflation (Rich, 2013). Furthermore, most homeowners in the United States primarily owned housing assets that were highly leveraged. Meaning if someone had a mortgage of $80,000 on a $100,000 home and the value of the home drops 20 percent, now as a homeowner they are losing money because their home is now worth $80,000 (Mian & Sufi, n.d.). Now they are balanced out basically losing 100 percent because no profits are being made. With... ... middle of paper ... ...ect, an increase in the aggregate price level, reduces purchasing power. More households will try to save and spending drops. However the main focus for 2016 is the housing market, that it will be a positive effect for the economy (Krugman & Wells, 2013). Now, the producer price index, or PPI that measures change in prices of good purchased by producers has been slowly edging up to start up 2016. For the 2015 year the PPI as a whole rose .8 percent. This means that inflations is currently running below the Fed’s 2 percent target (Mutikani, 2016). So the PPI is normally as early warning signal, if the PPI can stay up economists hope that it can push consumer inflation up too. By macroeconomics focusing on the whole picture, if the economic growth continues into mid-year of 2016 then we may see the demand for properties rise and consumer spending with it will rise.
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