Explain business cycle fluctuations in major economies durin

Explain business cycle fluctuations in major economies during the 2007-2009 financial crisis.

Solution

During the financial crisis of 2007 - 2009, the major economies went into the recession and elongated recession (depression) in the business cycle in their economies. It started with the US economy when real estate bubble busted and subprime lending showed its ugly and defaulter face. It caused collapse of the few financial institution and closing of businesses. It led to the unemployment and decrease in the aggregate demand in the US economy. It made the US economy to go into the recession. Due to globalization, other major economies were exporting goods and services to the USA to cater the aggregate demand in the USA. Since, the aggregate demand in the USA decreased, then it negatively affected the export business of other major economies and layoff took place in other major economies. It brought unemployment and decrease in domestic aggregate demand, leading the economy into recession. Besides, the banks and other financial institutions had their exposure in US financial market and they also suffered. It further contributed to the economy pushing towards the recession. In such a way, the globalization spread the contagious effect from one economy to another economy and recession took place in major economies due to the 2007-09.
the government of these countries recognized it later and took different corrective action. But, inside and outside lag effect caused the economies to respond slowly and extended recession became depression before going for the recovery. While happening this, the US government launched a stimulus package of over $700 billion to revive the economy. It showed results after a few years, and the US economy went to recovery and then growth phase of the business cycle.