Accordingto the Bureau of Economic Analysis, nations including the U.

S. experiencedcontraction of GDP during the Great Recession. The negative growth rate ofquarterly GDP effectively signaled recession, alongside the rise in long-termunemployment rate.

In this case, AD/AS model is a useful tool in examining andunderstanding the macroeconomic performance of a country and the generation ofits GDP. In theearly-2008, the U.S.

Federal Government decided to reduce the short-terminterest rate to 3%, from 5.35% four months before. This was believed to reducethe real cost of borrowing, thereby stimulate economic activity. According tothe Interest-rate effect, investment and consumptions react negatively tointerest-rate changes. As the interest-rate falls, the return on savings falls;hence, the opportunity cost of spending is lower, and it is relatively cheaperto raise liquidity of firms and household consumers. These supposedly increasethe AD and thereby shifting the equilibrium output level outward.

 In theimplementation of Economic Stimulus Act of 2008, rebate checks were given outto individuals alongside a tax cut. This stimulus package was designed to boostconfidence level and encourage business investments in the economy, but it wasinsufficient to create new jobs. On the other hand, this stimulus act raisedloan limits for government-sponsored mortgage agencies, such as Fannie Mae andFreddie Mac, which substantially led to bankruptcy as their balance sheets wereoverwhelmed with toxic subprime debts. Foremost, this act was blamed in theharming of U.

S. budget outlook, by adding to the deficits and debts (Ruffing etal., 2011).The programsuggested by former U.S.

President George W. Bush left the office with a $500billion budget deficit and the federal debt advanced to $10 trillion. Thisdevastating amount of sovereign debt has weakened the purchasing power ofdollar (Kimberly Amadeo, 2017).