SAPM ASSIGNMENT 1

SUBMITTED BY:
1. MADHURI SINGH (14202009)
2. MOUMI MONDAL (14202030)
3. SAI KIRAN (14202033)

1. RECESSION IN US SINCE 1900AD

1904- 1905
Though not severe, this downturn lasted for nearly two years and saw a distinct decline in the
national product. Industrial and commercial production both declined, albeit fairly modestly.
The recession came about a year after a 1901 stock crash. Trade and industrial activities
decreased by 17.1%.

1907
A run on Knickerbocker Trust Company deposits on October 22, 1907, set events in motion
that would lead to a severe monetary contraction. The fallout from the panic led to Congress
creating the Federal Reserve System. Trade and industrial activities decreased by 31%.

Aug 1929 Mar 1933

Known as the Great Depression. Stock markets crashed worldwide. A banking collapse took
place in the United States. Extensive new tariffs and other factors contributed to an extremely
deep depression. The United SAtates remained in a depression until World War II. In 1936,
unemployment fell to 16.9%, but later returned to 19% in 1938 (near 1933 levels). Trade and
industrial activities decreased by 26.7%.

Recession of 1945 (8 months duration)

The decline in government spending at the end of World War II led to an enormous drop in
gross domestic product, making this technically a recession. This was the result of
demobilization and the shift from a wartime to peacetime economy. The post-war years were
unusual in a number of ways (unemployment was never high) and this era may be considered
an end-of-the-war recession".

Dec 2007 June 2009

Known as the Great Recession. According to the U.S. National Bureau of Economic
Research (the official arbiter of U.S. recessions) the US recession began in December 2007
and ended in June 2009, and thus extended over 18 months,
The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky
loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman
Brothers on 15 September 2008, a major panic broke out on the inter-bank loan market. There
was the equivalent of a bank run on the shadow banking system, resulting in many large and
well established investment and commercial banks in the United States and Europe suffering
huge losses and even facing bankruptcy, resulting in massive public financial assistance
(government bailouts).

The global recession that followed resulted in a sharp drop in international trade, rising
unemployment and slumping commodity prices. Several economists predicted that recovery
might not appear until 2011 and that the recession would be the worst since the Great
Depression of the 1930s. Economist Paul Krugman once commented on this as seemingly the
beginning of "a second Great Depression."
Governments and central banks responded with fiscal and monetary policies to stimulate
national economies and reduce financial system risks. The recession has renewed interest in
Keynesian economic ideas on how to combat recessionary conditions. Economists advise that
the stimulus should be withdrawn as soon as the economies recover enough to "chart a path
to sustainable growth".

2. Role of Central Bank in regulating interest rates to control recessions?

In the United States, the central bank the Federal Reserve (the Fed) is tasked with
maintaining a certain level of stability within the country's financial system. Specific tools are
afforded the Fed that allow for changes to broad monetary policies intended to implement the
government's planned fiscal policy. These include the management and oversight of the
production and distribution of the nation's currency, sharing of information and statistics with
the public, and the promotion of economic and employment growth through the
implementation of changes to the discount rate.
The most influential economics tool the central bank has under its control is the ability to
increase or decrease the discount rate. Shifts in this crucial interest rate have a drastic effect
on the building blocks of macroeconomics, such as consumer spending and borrowing.

Decrease to the Discount Rate

When the Fed makes a change to the discount rate economic activity either increases or decreases
depending on the intended outcome of the change. When the nation's economy is stagnant or
slow, the Federal Reserve may enact its power to reduce the discount rate in an effort to make
borrowing more affordable for member banks.

When banks can borrow funds from the Fed at a less expensive rate, they are able to pass
savings on to banking customers through lower interest rates charged on personal, auto or
mortgage loans. This creates an economic environment that encourages consumer borrowing
and ultimately leads to an increase in consumer spending during the time in which rates are
low.
Although a reduction in the discount rate positively affects interest rates for consumers
wishing to borrow from banks, consumers experience a reduction to interest rates on savings
vehicles as well. This may discourage long-term savings in safe investment options such
as certificates of deposit (CDs) or money market savings accounts.

Increase to the Discount Rate

When the economy is growing at a rate that may lead to hyperinflation, the Fed may increase
the discount rate. When member banks cannot borrow from the central bank at an interest rate
that is cost-effective, lending to the consuming public may be tightened until interest rates are
reduced again. An increase to the discount rate has a direct impact on the interest rate charged
to consumers for lending products, and consumer spending shrinks when this tactic is
implemented. Although lending is not as attractive to banks or consumers when the discount
rate is increased, consumers are more likely to receive more attractive interest rates on lowrisk savings vehicles when this strategy is set in motion.