to the Bureau of Economic Analysis, nations including the U.S. experienced
contraction of GDP during the Great Recession. The negative growth rate of
quarterly GDP effectively signaled recession, alongside the rise in long-term
unemployment rate. In this case, AD/AS model is a useful tool in examining and
understanding the macroeconomic performance of a country and the generation of
its GDP.


In the
early-2008, the U.S. Federal Government decided to reduce the short-term
interest rate to 3%, from 5.35% four months before. This was believed to reduce
the real cost of borrowing, thereby stimulate economic activity. According to
the Interest-rate effect, investment and consumptions react negatively to
interest-rate changes. As the interest-rate falls, the return on savings falls;
hence, the opportunity cost of spending is lower, and it is relatively cheaper
to raise liquidity of firms and household consumers. These supposedly increase
the AD and thereby shifting the equilibrium output level outward.

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In the
implementation of Economic Stimulus Act of 2008, rebate checks were given out
to individuals alongside a tax cut. This stimulus package was designed to boost
confidence level and encourage business investments in the economy, but it was
insufficient to create new jobs. On the other hand, this stimulus act raised
loan limits for government-sponsored mortgage agencies, such as Fannie Mae and
Freddie Mac, which substantially led to bankruptcy as their balance sheets were
overwhelmed with toxic subprime debts. Foremost, this act was blamed in the
harming of U.S. budget outlook, by adding to the deficits and debts (Ruffing et
al., 2011).

The program
suggested by former U.S. President George W. Bush left the office with a $500
billion budget deficit and the federal debt advanced to $10 trillion. This
devastating amount of sovereign debt has weakened the purchasing power of
dollar (Kimberly Amadeo, 2017).