Financial Crisis

When people talking about how to describe the performance of an economy, there would be many types of variable to measure and we are going to focus on three main macroeconomic variables. Real gross domestic(GDP), the inflation rate, and the unemployment rate. "Real GDP measures the total income of everyone in the economy. The inflation rate measures how fast prices are rising. The unemployment rate measures the fraction of the labor force that is out of work."(Mankiw,2012,P3) It is pretty obvious that people can use these three variables to understand what's the current output of goods and services produced by labor and property located in the U.S., what's the percentage change in the average level of prices from the year before, and what's the percentage of people in the labor force who do not have jobs.

According to the Bureau of Economic Analysis, Real GDP increased at an annual rate of 2.5% in the second quarter of 2013, in the first quarter, real GDP increased 1.1%. Compare to 2008, real GDP decreased at annual rate of 6.3% in the fourth quarter, according to final estimate released by the BOEA, in the third quarter, real GDP decreased 0.5%.(BOEA) Throwback to 2008, since august, Fannie Mae& Freddie Mac stock price dropped rapidly, those financial institution, holding Fannie& Freddie bonds got huge loses, which affect the third quarter real GDP.

The latest annual inflation rate is 2.0% and compare to 2008, inflation rate keep dropping since January from 4.3%-0.1%, till December, which average inflation rate is 3.8%. However, 2009 inflation rate average is -0.4%, especially July which reached -2.1%.(USinflation.org) We can see in the 2009 the inflation rate average is at an negative percent for long time, when that happened usually cause deflation, "long time deflation will discourage investment and production, lead to rising unemployment and economic recession."( Bernanke, 2002) Today, most economists favor a low and steady, which is the current annual inflation rate. "low inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in downturn, and reduce the risk that liquidity