Discuss how the drastic decrease in home construction from 2007 to 2008 affected the GDP.
As due to the decrease in home construction, it directly affects the economy, firstly it lowers the value of all homes, whether owners are actively selling it or not. It reduces the number of home equity loans available to owners. They will cut back on consumer spending . By which it makes the economy weak, since it directly affects the GDP or slows down the GDP. As, nearly 70 percent of the U.S. economy is based on personal consumption . A reduction in consumer spending contributes to a downward spiral in the economy. That leads to further unemployment, further reduction in income, and further reduction in consumer spending. If the Federal Reserve doesn’t intervene by reducing interest rates then the country could fall into a recession. Since, its direct affect was on the GDP.
So If GDP is slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve. That, in turn, can easily further depress the economy and consumers have less money to spend on purchases. If the GDP growth rate turns negative, then the country’s economy is heading towards or is already in a recession. That’s when the economy contracts, and GDP is less than the quarter or year before.
In 2008, the country had experienced critical and worst financial positions and lead towards the great depression into the country. New York stock Exchange has also experienced the major collapse because of the sharp decreasing share prices. Major effects of a decrease in home constructions are including the bankruptcy of Lehman that is the investment bank and the financial collapse of Morgan Stanely. Moreover, it resulted the decrease in value of home and rate of home loans as well. Major bankruptcy in financial sectors results in the collapse of share market and disturbs the economic stability of the country. In order to overcome these challenges, the US banking system and government introduces major policies like the equally colossal intervention policies.