During the recession of 2007-2009, the U.S. economy was experiencing a decrease in home prices and consumer wealth, a credit crisis in the financial markets, and declining consumer and business confidence

What components of aggregate demand were affected and what was the impact on real output? What were the policy options?

The decrease in home prices and consumer wealth will adversely affect consumption spending as well as residential fixed investment spending. The credit crisis will also hurt consumption and investment spending as the households and firms find it difficult to obtain lines of credit. Finally, the decline in consumer and business confidence will lower consumption and investment spending further. Thus, aggregate demand will decrease, lowering real output. The policy prescription is one of expansionary monetary and fiscal policies to stimulate the economy.