Expansionary Economy

Expansionary Economy

Yolanda Estes

ECO 316 Financial Institutions & Markets

Stephanie Webb

February 13, 2012

Money is an important factor in the world’s economic system. The money supply is also a determining factor of interest rates, prices, employment, exchange rate and other factors. An increase or decrease in the money supply can affect the entire economic system. The money supply is managed by monetary policy and it “influences the performance of the economy and is reflected in inflation, economic output and employment “(Federal Reserve Bank). Throughout history there are times when the economy experiences periods of financial instability. When the economy experiences periods of economic decline, in order to prevent economic disaster the Federal Reserve will intervene with monetary policy or inject money to assist in stabilizing the economy.

In 2007 the economic condition in the United States and globally was greatly impacted by the U.S. Subprime mortgage crisis. Many people dream of owning their own home and in the early 2000s they were able to fulfill that dream and purchase homes. Although, many people were living the “American Dream” for many caught in the middle of the mortgage crisis that dream turned into a major disaster. The subprime mortgage markets set in motion/triggered financial crises which lead to foreclosures, bankrupt corporations, poor investments, bailouts, unemployment and other factors which were felt around the world. Subprime lending was extended to individuals with poor credit and lower income, and considered high risk.

The borrower’s loan was actually an Adjustable Rate Mortgage (ARM). An adjustable rate mortgage “the interest rate rises and falls with market interest rates” (Hubbard p 295). Many borrowers initially had low interest rates and the monthly payment was affordable, but after a couple of years the interest rate began to increase. The higher interest rate caused the monthly mortgage...