During the 2007-2009 Great Recession, households experienced a decline in wealth due to the housing market collapse, and tightening lending standards made it more difficult for businesses to get loans (at any interest rate).

b) Illustrate the effects in the AD/AS graph from the lecture slides. What is the effect on (i) the price level and (ii) unemployment?

c) Briefly compare the model implications with the data from the lecture slides.

\fGreat Recession FRED - Consumer Price Index for All Urban Consumers: All Items in U.S. City Average 15.0 12.5 10.0 7.5 Percent Change from Year Ago 5.0 2.5 0.0 2.5 1950 1960 1970 1980 1990 2000 2010 2020 Source: U.S. Bureau of Labor Statistics\fGreat Recession FRED ~ - Real Private Residential Fixed Investment Real Gross Private Domestic Investment 4,000 3,600 3,200 2,800 2,400 Billions of Chained 2012 Dollars 2,000 1,600 1,200 800 400 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: U.S. Bureau of Economic AnalysisGreat Recession FRED - S&PICase-Shiller U.S. National Home Price Index 320 280 240 200 Index Jan 2000=100 160 120 80 40 1995 2010 2020 1990 2000 2005 2015 Source: S&P Dow Jones Indices LLCGreat Recession FRED ~- Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks 12 11 10 Co Percent N 1995 2000 2005 2010 2015 2020 Source: Board of Governors of the Federal Reserve System (US)