BOB: Hi, Cho. I'm intrigued to see how macroeconomics allows us to explain recent economic events such as the Great Recession that affected
so many people. But there's one thing I don't understand. Was the collapse of the housing bubble the only cause of the recession, or were
there other factors as well?
CHO: Hi, Bob. I agree that macroeconomic theory offers an entirely new perspective on how the economy works. To answer your question, the
crash of the housing market was a major factor but not the only cause of the Great Recession. The professor mentioned that the
system deteriorated as well, an event that deepened the economic downturn even further.
BOB: I see. So the bursting of the housing bubble caused the initial decline in aggregate demand. Then the financial crisis caused aggregate
demand to decline even more. Could you also help me understand how to use the aggregate demand and aggregate supply model to explain
the effect of the bursting of the housing bubble on GDP?
CHO: The professor used the aggregate demand and aggregate supply model to show that
houses causes an
? shift of the aggregate
curve.
in spending on construction of new
BOB: I see it now. And as a result, GDP
as well. I would like to use a graph to illustrate what you've just said.
