Question

Discuss the housing market crash in 2008 in a macroeconomic setting. Include models and information that would have indicated some event like the crash was coming. Also discuss the impact of this crash on the US market. Include some well known macroeconomic models with diagrams and detailed explanation

Answer 1

Housing market crash was highly due to mortgage backed securities as Financial instrument which gave buyers to purchase homes at low cost low interest despite of low credit scores .

This led to high booming prices because of Aggregate demand and people couldn't pay their debts ultimately leading to Financial crisis as banks were insolved.

This impacted banks balance sheets and liquidity in market reduced to all time low causing Great Recession. The lack of financial cintrols and yield curve inversion were strong indicator that recession was about to set in as predicted by various analysts and investors. Lack of Dodd frank Act and Corporate governance were culprits which caused this huge recessionary gap in US.

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To curb this recession the US government adopted expansionary fiscal policy by raising spending and reducing taxes which led to lowered private sector spending and the economy exhibited crowding out effects as described inin macroeconom model.