Lesson 6: A Global Economy

Question 1

American Recovery and Reinvestment Act Definition

Answer 1

a law signed by President Obama in 2009; it aimed to stimulate the economy and reduce unemployment by funding the creation of jobs, increasing unemployment benefits, and reducing taxes

Question 2

Bubble Definition

Answer 2

a situation that occurs when buyers drive prices higher than the actual worth of the product or stock in the hope that prices will rise higher still

Question 3

Debt Ceiling Definition

Answer 3

a limit placed by law on the amount of money that the U.S. government can borrow

Question 4

Default Definition

Answer 4

a failure to repay a debt

Question 5

Globalization Definition

Answer 5

the spread of links among the world’s economies so that they form a global economy

Question 6

Mortgage Definition

Answer 6

a loan to purchase a piece of property that allows the lender to claim the property if the mortgage is not paid

Question 7

Subprime Mortgage Definition

Answer 7

a type of mortgage granted to individuals with poor credit histories

Question 8

True or False: In the 1990s and early 2000s, America’s trade with other countries grew dramatically.

Answer 8

True

Question 9

How did trade agreements with countries in the Americas and Asia strengthen the United States, economically?

Answer 9

Trade agreements with countries in the Americas and Asia strengthened U.S. relations and opened trade in new areas. American businesses benefited from lower production costs and the opening of new markets for trade. American consumers benefited from lower prices for goods and services.

Question 10

What are some downsides of globalization?

Answer 10

Globalization, or the spread of a global economy, also posed potential problems, though. Some American workers suffered when companies moved work overseas. Also, when one country suffered an economic crisis, the entire global community was at risk.

Question 11

What was the state of the U.S. economy in the 1990s? What spurred this economic growth? What were dot-coms? Why did some dot-com owners use risky business practices? How did investors cause a bubble in the stock market for dot-coms? What happened when dot-coms failed to yield a profit? Which dot-coms eventually survived and are prosperous today?

Answer 11

In the 1990s, the American economy grew strongly. This growth was partly due to the creation of new businesses and jobs in the technology industry.
Many Internet start-up companies, known as dot-coms, were founded during the decade. In some of these, owners and managers used risky business practices. They thought that if the number of customers increased, then profits would increase, too. This worked for some companies but not for all of them. Investors saw the potential to make profits from dot-coms, so they bought stock in the companies. High demand for these stocks created a stock-market bubble. A bubble is an unstable condition of prices driven above the real value of an asset by buyers hoping that prices will rise further. When many dot-coms failed to yield a profit, the bubble burst and stock prices plunged. Investment in these companies dried up. Between 1999 and 2001, many dot-com businesses had to close. Other companies, such as Google and Amazon, suffered losses but survived and eventually grew.

Question 12

What was the state of the U.S. economy in 2001? How did the bursting of the dot-com bubble contribute to this? How did the 9/11 attacks contribute to the recession? How did the transfer of American manufacturing jobs deepen the recession? How did the federal government and the Federal Reserve System respond to the recession? How was the state of recovery in 2003 and 2004?

Answer 12

In 2001, the American economy entered a recession, partly as a result of the dotcom bubble bursting. A recession occurs when the economy shrinks instead of growing. The September 11 attacks also hurt the stock market, and the transfer of American manufacturing jobs to other countries deepened the recession. The federal government responded to the economic crisis by lowering taxes, while the Federal Reserve System lowered interest rates to encourage people and businesses to borrow. The economy gradually recovered in 2003 and 2004.

Question 13

After the stock market crash of 2000, what did Americans realize influenced the boom of the 1990s? How had accounting firms and banks utilized fraud? What was the fraud scandal concerning the Houston energy company Enron? How did the Fraud at Enron tarnish American’s trust within corporations?

Answer 13

When the stock market crashed in 2000, Americans realized that fraud had helped trigger the 1990s boom. Accounting firms and banks had increased stock prices by hiding the companies’ real financial situation. Enron, a Houston energy company, exemplified this trend. Enron bought and sold electricity instead of producing it on its own. The company falsely reported billions of dollars in profits. A Texas jury convicted Enron executives of fraud, but it was too late to help investors. Fraud at Enron damaged Americans’ trust of corporations in general.

Question 14

Which countries were included within the North American Free Trade Agreement (NAFTA)? When was it established? In 1995, the United States became a member of which organization? What does the World Trade Organization work to do? What did NAFTA and WTO encourage the United States to do? What was the Central America Free Trade Agreement in 2005? Which country did the United States establish a free-trade agreement with in 2007? What did these agreements allow?

Answer 14

The North American Free Trade Agreement (NAFTA), established in 1993, linked the United States, Canada, and Mexico in a free trade zone. In 1995, the United States became a member of the World Trade Organization (WTO). The WTO works to remove barriers and to encourage trade and investment among countries. NAFTA and the WTO encouraged the United States to negotiate similar agreements in other areas of the world. In 2005, the Central America Free Trade Agreement (CAFTA-DR) created a free-trade zone between the United States and several Latin American countries. The United States also negotiated a free-trade agreement with South Korea in 2007. Each of these agreements allowed U.S. businesses to sell more goods and services overseas. Meanwhile, foreign businesses were able to increase sales in the United States.

Question 15

How were America’s free-trade agreements controversial?

Answer 15

These free-trade agreements increased global trade, but they were controversial. These agreements led some American businesses to move operations to other countries, where worker pay was lower and environmental regulations were weaker.

Question 16

What is the European Union? In 2004, what was the EU expanded to include? How did membership spark new opportunities and U.S. investment? What did the United States relationship with the EU mean?

Answer 16

One of the world’s main trading and investment alliances is the European Union (EU). The EU includes most European countries. In 2004, the EU expanded to include countries from Central and Eastern Europe and the Mediterranean. Membership in the EU created new opportunities for these countries. It also attracted American investment. Many American banks and other firms opened branches within the EU to have access to its large market. In this way, what happened in the EU could affect the U.S. economy.

Question 17

What was a benefit of globalization? How did the closely interconnected banking system worldwide pose a threat to the United Sates?

Answer 17

Globalization brought benefits, like the expansion of trade opportunities. It could also present potential problems for the United States. The banking system throughout the world became closely connected. If the European banking system or the American banking system faced trouble, both sides would suffer the consequences.

Question 18

In 1999, what shared currency did the EU adopt? What were the countries using this currency known as? By the 2010s, how did the euro compare to the U.S. dollar, in terms of popularity? What was the relationship between Eurozone companies and the United States?

Answer 18

In 1999, most countries in the European Union adopted a shared currency, known as the euro. The countries using the euro were known as the euro zone. The euro was the second most widely used currency in the world, behind the American dollar, by the 2010s. Euro-zone companies held large investments in the United States, and U.S. firms had large investments in the euro zone.

Question 19

How did the interconnection between the United States and the European Union pose a threat to both parties’ economies?

Answer 19

The EU was one of America’s most important trade partners in the early 2000s. As a result, economic problems in Europe could hurt the United States. If euro-zone countries had less money to invest, Americans would have less money to grow new or existing businesses. If people and businesses in the euro zone had less money to spend, they would buy fewer products from American exporters.

Question 20

How did low interest rates influence the purchase of homes in America? What is mortgage? What created a housing bubble?

Answer 20

Low interest rates also allowed more Americans to buy homes, and low interest rates made larger mortgages affordable. Mortgages are loans to buy a piece of property that allow the lender to claim the property if the mortgage is not paid. As the demand for homes and mortgages increased, home prices also increased. This created a housing bubble much like the dot-com bubble that the stock market had experienced.

Question 21

During the housing bubble, what did banks and mortgage companies believe? What were subprime mortgages? In the beginning, what were the interest rates on subprime mortgage? What happened when they increased?

Answer 21

Banks and mortgage companies thought that home prices would keep increasing. As a result, they offered mortgages to people who were considered lending risks because they could not easily afford the payments. These loans were known as subprime mortgages. In the beginning, subprime mortgages had low interest rates, but the rates were often adjustable so that they could increase with market rates. When that happened, borrowers risked defaulting, or not being able to pay their mortgages.

Question 22

In 2006 and 2007, what caused the housing bubble to burst? When prices dropped, what did this do to the difference between mortgage and house value for many homeowners? What happened when interest rates increased? What was the affect of foreclosure? What did the United States enter in 2007?

Answer 22

In 2006 and 2007, overbuilding and a flood of sellers seeking to cash in on high prices for their homes caused American home prices to drop, which burst the housing bubble. When prices dropped, many homeowners owed more on their mortgages than their homes were worth. When interest rates increased, some could not pay their mortgages. They also could not sell and recover their investment because their homes had lost value. Many of these borrowers defaulted on their mortgages, and banks repossessed, or foreclosed on the homes. Foreclosures left Americans without homes and left banks with massive financial losses. This triggered an economic crisis in which banks stopped making loans, businesses stopped expanding, and the stock market crashed. The United States entered another recession in 2007.

Question 23

What did the stock market crash and the mortgage crisis in 2007 lead the United States to do? What did this do to American business and unemployment? What did it do to consumers and morale? How did it affect economies around the world? How did the Economic Crisis of 2007 force the United States to reverse its policy on regulation?

Answer 23

The stock market crash and the mortgage crisis in 2007 led Americans to cut back on their spending. Reduced spending caused American businesses to fail, which increased unemployment. Consumers lost their jobs, their homes, their retirement savings, and their confidence in America. Globalization, however, meant that the economic problems extended to the world. Decreases in American spending caused job losses for America’s trade partners, such as China and Mexico. Because Europe’s banks had bought subprime mortgages from American banks, the bursting of the housing bubble hurt European banks, too. It also made investors more aware of risk. They began to demand higher interest rates for loans to governments with poor finances. Governments across Europe were forced to cut back, European banks stopped lending, and Europe went into recession, too. Europe’s recession hurt American businesses because they lost sales in Europe. For decades, the United States government had cut regulations, believing that government interference would damage banks. When the financial crisis resulted from what many saw as weak regulation, the government reversed its policy.

Question 24

In 2008, why did Congress issue money to bail out financial institutions? What did the Bush Administration believe this would do? What did officials in this administration believe?

Answer 24

In 2008, Congress provided money to bail out, or save, struggling insurance companies, banks, and financial institutions. The Bush administration thought that many large banks and financial firms were “too big to fail.” Administration officials believed that the connectedness of these companies to other businesses put the United States at risk of financial collapse and an economic depression. The bailout helped ensure the survival of these companies, but the economy remained weak.

Question 25

When President Barack Obama took office in 2009, what state was the economy in? What was the condition of unemployment, poverty, and house prices? How had this changed little by 2011?

Answer 25

When President Barack Obama entered the White House in 2009, Americans were still experiencing the effects of the economic recession. The unemployment rate for the year averaged close to ten percent. Fourteen percent of Americans lived below the poverty line. Home prices continued to fall. By 2011, little had changed. The unemployment rate hovered around nine percent and the poverty rate was close to 15 percent. The housing market had not yet recovered.

Question 26

What was the American Recovery and Reinvestment Act, signed in 2009 by President Obama?

Answer 26

In 2009, President Obama signed into law the American Recovery and Reinvestment Act. The act aimed to stimulate the economy and reduce unemployment. Through it, Congress supplied funds to create jobs, increase unemployment and food stamp benefits, and reduce taxes. Funds from the act also provided unemployment assistance. Improvement projects at schools and airports and on highways created jobs and helped communities.

Question 27

What is the support for the American Recovery and Reinvestment Act? What is the criticism of the act? How did this act create a political divide between the Democratic and Republican Parties?

Answer 27

A number of economists have argued that the recession would have been more severe without this stimulus. Critics, however, found problems with the act. Many felt that it had been ineffective, was too expensive, and had increased the federal deficit for no purpose. Some claimed that it increased unemployment. The act also created sharp political divides between the Democratic and Republican parties. All Republicans in the House of Representatives voted against the act. Only three Republican senators voted in favor of it.

Question 28

How did problems of the Economic Crisis of 2007 persist even after the American Recovery and Reinvestment Act in 2009?

Answer 28

American recovery from the 2007 economic recession occurred slowly. The stock market rallied, and it appeared as if the recession had ended by 2010, in the sense that the economy returned to growth. Americans still struggled, though. State and local governments reduced their work forces. The national unemployment and poverty rates remained high. In some years, the number of new jobs was lower than the number of young people reaching working age. The number of manufacturing jobs rose, but job creation did not reach pre-recession levels. Meanwhile, jobs and pay were unequally distributed. Most jobs were at the high and low ends of the pay scale. The financial industry had laid off workers, but employees who kept their jobs received high pay. This frustrated Americans whose taxes were used to bail out the companies that were “too big to fail.” The largest number of job increases occurred in low-paying jobs. Workers with these jobs had difficulty supporting themselves and their families.

Question 29

How did economic problems persist in America and in Europe?

Answer 29

In the 2010s, debt crises in the United States and Europe threatened the economic stability of the world. When President Obama asked Congress to raise the debt ceiling in 2011 and 2013, Republicans refused unless the President agreed to a compromise. The debt ceiling limits the amount of debt that the United States can owe. When the country nears the debt ceiling, Congress must vote to raise the limit, or the country risks default, or failure to repay a debt, and a possible financial crisis. Tax cuts, wars in Iraq and Afghanistan, and slow economic growth had pushed America’s debt to near its limit. Congress had to raise the debt ceiling to keep the country operating, but Republican members were only willing to do that if the President agreed to reduce the federal government’s spending. Meanwhile, a debt crisis occurred in Europe. Between 2009 and 2012, six euro-zone countries acknowledged that they were struggling to pay their debts and were facing default. Greece was the first country to show signs of problems. This situation presented an economic problem for the world by putting into question government bonds. If banks are worried about money they have lent to governments, they are less likely to lend money to businesses and individuals. Recognizing this, European and international agencies all provided bailout money. This bailout brought a temporary solution to the European debt crisis, but a number of countries continued to face heavy debts and a lack of economic growth. It was not clear that the debt problem had been corrected. A danger remained that one or