Ch 2 Economics: The Framework For Business

Sections 1 and 2
Gold 9/21/23
Blue 9/22/23

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 Learning Objectives

⦿2-1 Define Economics and discuss the global

economic crisis

⦿2-2 Analyze the roots of the Great Recession and

identify its impact on the economy

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 2-1 Economics: Navigating a
Crisis
⦿Understanding role of government, business, and
individuals requires understanding some basic
definitions
⦿Economy – Represents the flow of resources
through society
⦿Economics – study of choices that people,
companies, governments make allocating
resources
› Macroeconomics
› Microeconomics
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 Economics: Navigating a Crisis

⦿ Macroeconomics – study of the country’s overall

economic dynamics, such as employment rate, gross
domestic product, taxation policies
› Affects day to day
› Jobs available
› Cash you take home after taxes
› Inflation (how powerful your money is)

⦿ Microeconomics – focuses on smaller economic units

such as individual customers, families, and individual
businesses
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 Economics: Navigating a Crisis

⦿U.S. Economy
› Longest expansion on record (2009-2020)
› Unprecedented growth
⦿Covid-19 Stopped growth
› Federal response
● Relief spending
● Kept homelessness and hunger at bay
● Temporary measure
● Vaccinations allowed reopening

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 2-2 Economics and The Great
Recession
⦿ Last half of 1990s
› America enjoyed unprecedented growth
› Unemployment low
› Productivity high
› Inflation was low
› Standard of living rose
› American Economy grew $2.4 trillion in 5 years (nearly
33%)
● Dot.com bubble burst in 2000
● 9/11 terrorist attacks in 2001
› Stock market dropped, unemployment rose
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 2-2a Managing the Crisis

⦿ Federal Reserve (Nation’s Central Bank) put in an

effort to avert
recession
› Increase money supply
› Encouraged investment
● Decreased rates of 6.5% in mid 2000 to 1.25% by end of
2002
› Subprime mortgage loans came into play
● Loans to borrowers with lower credit scores
● High debt-to-income ratio
● Other signs of reduced ability to pay back
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 Managing the Crisis - Subprime

⦿ Subprime
› Attractive to borrowers and lenders
› Borrowers
● Getting a loan became a cinch
● First time ever, 100s of thousands of people could afford
homes
› Lenders
● All too willing to give loans
● Little or no documentation (proof of income)
● Little or no money down
● Demand for homes skyrocketed
● Prices raised year after year
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 Managing the Crisis - Subprime

⦿Subprime (continued)
› Attractive to lenders
● Provided higher return than many other investments
● Seemed low risk (because of house prices)
› Lack of regulations
● Other government oversight was gone
● Financial institutions did NOT maintain sufficient
reserves in case mortgage-backed funds lost value

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 Managing the Crisis – Subprime
Mortgages
⦿Subprime mortgages
› Did indeed LOSE value
› 2006 house prices peaked (ex 2.1)
● Began falling soon after
● Dropped 35% by 2009
› Borrowers found themselves “upside down”
● owed substantially MORE than house value
› Foreclosure rates climbed
● 33% more in 2010 than ‘09

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Subprime Mortgages

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 Managing the Crisis

⦿Mortgage values dropped

› Financial institutions began
to feel the pressure
● Many faced collapse
› Fear washed over whole banking industry
● Funds not available (day-to-day operations)
● Longer-term growth funding gone
● Layoffs announced across the board

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 Managing the Crisis

⦿2.6 million lost jobs

› Worst year since 1945
› Unemployment rose
● 9.3% in 2009
● 9.6% in 2010
› Total job losses of nearly 8 million
› Unemployment drop started in 2011
● Record low unemployment Feb 2020
● 3.5%
Quizizz
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 2-2b Moving in a Better Direction

⦿Federal Reserve (FED) – desperately tried to

intervene in economy to prevent total financial
disaster
› March 2008 staved off bankruptcy at Bear Stearns
› Early September 2008
● U.S. Department of Treasury seized Fannie Mae and
Freddie Mac
● Owned half of US Mortgage Market
● Bailed out AIG
● $85 billion loan

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 Moving in a Better Direction

⦿ Congress passed $700 billion economic bailout plan

early Oct. 2008
› Called TARP
● Troubled Assets Relief Program
› First half of money spent to invest in banks
› Second half spent to bail out auto industry
● Industry faced 2.5 million job losses
● GM
● Chrysler
› Public rallied against this high cost of bailout
● (why do you think this was??)
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 Moving in a Better Direction

⦿Obama and Congress passed $825 billion

economic stimulus package
› American Recovery and Reinvestment Act
› Designed to turn around economy in 2 years
› Plan included:
● Cutting taxes
● Building infrastructure
● Invest $150 billion in green energy

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 Moving in a Better Direction

⦿$825 billion stimulus (continued)

› Late 2011, economy turned slowly
● Employment grew 49 months in a
row
● Best run since WWII
› Many people traded good paying jobs for part-time
work and/or lower positions
● Constrained incomes
● Restrained consumer spending in years since

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 Canvas Assignments

⦿Please complete the Guided Notes for Ch 2,

Sections 1 and 2. You may submit this as a
screenshot on Canvas (5 pts)

⦿Complete the assignment in Canvas titled “2008

Bailout”. You need to write a few sentences
describing reasons why the public may have been
against the bailout (10 pts)

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