Global recession and credit crunch The financial crisis of 2007-08 had wide effe

Question

Global recession and credit crunch The financial crisis of 2007-08 had wide effects on the real economies across the globe. Falls in asset prices made many people worse off and led to falls in consumer spending. Companies found it harder to get the bank loans they needed to finance their current production. World trade contracted sharply, as did investment. Unemployment rose, as did personal and corporate insolvencies. In other words, the financial crisis led to a recession. In their struggle to recover from the post - 2008 global recession, many nations expanded their money supply and lowered interest rates to levels near zero, with the aim of stimulating both consumer spending and corporate investment. From summer 2007, central banks, including the US Federal Reserve and the Bank of England, became increasingly proactive in injecting liquidity into the financial system. This process of increasing the size of the money supply is quantitative easing. For example, the Fed has injected some $2.3 trillion into its quantitative easing programme. You are required to answer the below questions. Include the answers in your individual business report. Select an economy and assess the effectiveness of its government macroeconomic policies post 2007-08 financial crisis 5marks

Explanation / Answer

My selected economy for the answer is the economy of the USA.
The 2008 crisis led Federal Reserve and the Federal government to work together to recover the economy from the setback of the crisis. The working model was inspired by Keynesian economic proposals that professed the active government interventions to stimulate the economy. As a result, the government came out with $787 Billion (it was updated to $831 Billion) package for the period of 2009 to 2019 under the American Recovery and Reinvestment Act, 2009. It had the detailed discretionary fiscal policy (expansionary) involving the spending upon the different sectors so that economic recovery is facilitated. While doing so, the Federal Reserve came up with expansionary monetary policy. It involved decreasing the federal funds rate up to 0%, regular purchase of government bonds and securities by the FOMC to inject money into the economy and encouraging the banks to lend more to the households as well as firms for investment of different nature. Automatic stabilizers were also working in the name of unemployment benefits to pull back the economy from the troughs of recession. Though, these policies took time due to the inside lag (time taken to judge the right policy and implement) and outside lag (time to show the impact).
After the 2 to 3 years of continuous work, the economy started to show the signs of recovery and afterwards the Fed also got encouraged about the policy prospects though the expansionary policy continued. Afterwards, the decrease in unemployment rates, decrease in claims of unemployment benefits, rising GDP made the Fed to increase the Federal fund rates. Today, the Federal funds rate is 1% to 1.25%, the unemployment rate is 4.1%, inflation rate is 2% and the GDP growth rate in the Q-3 of 20017 is 3%. These are the macroeconomic indicators that reflect the success of the expansionary fiscal and monetary policy applied by the relevant authorities in the USA. It has put the economy of the USA on the path of growth once again.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.