Final answer:
The 2007–2009 recession resulted from a variety of factors including job losses, declining home values, and a meltdown in the financial markets, which led to reduced consumption and investment. The government responded with measures like the American Restoration and Recovery Act to alleviate the recessionary impact.
Step-by-step explanation:
Causes of the 2007–2009 Recession
The 2007–2009 recession, also known as the Great Recession, began with significant reductions in investment and consumption spending. Several factors contributed to this economic downturn. According to the Bureau of Labor Statistics (BLS), a series of job losses, declining home values, declining incomes, and a general uncertainty about the future led to a fall in consumption expenditures. Household spending dropped by 7.8%. Additionally, the recession was exacerbated by home foreclosures and a meltdown in U.S. financial markets. This crisis in financial markets negatively affected consumer confidence and spending and led to a decrease in investment by businesses. The interruption of credit flow due to the banking crisis also played a critical role in reducing investments.
Recessionary gaps can be caused by numerous factors including a decline in consumption, a rise in savings, a fall in investment, a drop in government spending, a rise in taxes, a fall in exports, or a rise in imports. During the Great Recession, major causes such as job losses, declines in home values, foreclosure increases, and a lack of consumer confidence led people to cut back on spending, which directly affected the economy. The aggregate expenditure line shifted downwards due to these factors, thus contributing to the recession.
As a response, the government took action by implementing programs like the American Restoration and Recovery Act to stimulate the economy. This Act provided tax credits for home buyers, offered incentives such as "cash for clunkers", and extended unemployment benefits to battle the economic slump.