The 2007-2009 Financial Crisis

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The central bank carries about its business by supervising banks, providing bank services, and distributing currency to finance the entire country. It's fiscal responsibilities included paying government bills, selling government securities, and distributing currency (McDougal 482-483). Currency is distributed when the Fed makes loans to banks; this gets money into circulation. The primary bank is also able to control how much money is put into the economy using monetary policies.

There are three monetary tools that are used to influence the economy. Open market operations sale and purchase government bonds and stocks. This is the most commonly used policy to adjust money supply. The federal funds rate is the interest rate banks charge each
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citizens because of the idle economy. America was unprepared because little was done to prevent the crisis and much was done to encourage it. According to Yener Altunbas, Simone Manganeli, and David Marques-Ibanez, "the 2007-2009 financial crisis resulted in the largest realization of bank risk since the Great Depression, producing record levels of unemployment... [because of] banks with large size, low levels of capital, unstable funding and aggressive credit expansion in the years before the crisis." Before 2007, banks kept low interest rates, making it easier for consumers and businesses to borrow money. The problem was the money being lent out was borrowed money. Since it was easy to get money, many Americans figured it was a great opportunity to become homeowners. The great demand for houses led to inflation in home prices that rose to unsustainable levels. Banks noticed this and began to refuse to lend out money in fear that they would run out and go bankrupt. The sudden halt on loans quickly caused a large drop in aggregate demand, leading to lower production and ultimately no available jobs. If someone who had taken out a loan suddenly lost their job, they would not be able to pay it back, meaning they'd have to get a default on the loan. Those who had taken out a loan for a mortgage found themselves with a foreclosed homes and out on the streets. Even after the recession …show more content…
"The Administration worked with the Federal Reserve and the FDIC to help repair the financial system" (Romer 3). All three worked to "stabilize the housing market" and fix the problem caused prominently by banks and consumers. The Fed reduced mortgage interest so that those who still had a home could afford to stay in it. It also bought large quantities of government bonds and mortgage-backed securities to further reduce interest rates, according to Romer. Furthermore, it cut taxes and made income-support payments. These actions had a positive impact that resulted in an increase in real GDP and a decrease in