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Review Lessons 31-3 and 32-1 in your study guide and pages 845, 853-855 in your textbook.
Read the “Great Recession" information and answer questions 28-30.
Between 2008 and 2010, the United States experienced its worst economic crisis since the
Great Depression. Dubbed "The Great Recession," this crisis was largely a result of a financial
meltdown that took place in 2007 and 2008. Although economists disagree about the exact
source of the meltdown, many believe that it was first caused by the 2006 bursting of the
housing bubble. The effects of the housing bubble spread quickly throughout the financial sector,
leading to a credit crunch that hurt businesses and consumers alike and resulted in widespread
unemployment. During the mid-2000s, the American economy was growing rapidly. Mortgages
and housing prices were central to this economic boom. Because people were making so much
money by selling their homes, and borrowing on their existing homes through a home equity line
of credit, consumer spending increased, which contributed to a growing economy. One of the
factors driving up housing prices was an increase in the use of subprime mortgages. In 2004 the
percentage of mortgages that were subprime more than doubled, from under 10 percent to nearly
20 percent. By 2006, the year the housing bubble burst, subprime mortgages made up over a fifth
of all new mortgages. At the same time, median housing prices jumped nearly 25 percent in the
three years between 2003 and 2006. The problem with subprime loans is that they are riskier, and
in 2006, the results of those risks were manifested as millions of Americans began to default on
their
mortgages.
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28.
Why do you think the median sales price for new homes increased so much during the
mid-2000s?
29.
How do you think the rise in subprime lending contributed to the credit crunch?
30.
Why do you think banks expanded their subprime lending so much in the mid-2000s?