Answer to Question 1
Both in the United States and the Euro area, unemployment remains very high. What is behind this persistently high unemployment is low output growth, and behind this low growth are many factors like declining housing prices and low housing investment. Banks are still not in good shape, and bank lending is still tight. Consumers are cutting consumption. And the crisis has led to a large increase in budget deficits, which have in turn led to a large increase in public debt over time. Countries must now reduce their deficits, and this is proving difficult. In some European countries, governments may not be able to adjust and may default on their debt.
Answer to Question 2
Other countries were affected through two channels. The first channel was trade. As U.S. consumers and firms cut spending, part of the decrease fell on imports of foreign goods. The second channel was financial. U.S. banks, badly needing funds in the United States, repatriated from other countries, creating problems for banks in those countries. The result was not just a U.S., but a world recession.
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