Financial Crisis and Aftermath

Date: Nov 3, 2017

Introduction

The financial crisis that occurred in 2007-2008 is considered the worst globally because it made the whole world experience a hit on the economic growth and resulted to a major collapse of many financial institutions, stock markets, housing markets and national and international economies at large which affected employment opportunities and general reduction in production and consumption. 

Financial crisis arose from the situations like easy accessibility to credit facilities especially in US due to easy inflow of foreign funds from European economies, and there was a decrease in interest rates which made loans available for investment and for consumption uses. In all the financial activities, there were no proper laws and regulation from government to control the financial institutions in terms of lending and provision of other financial products like credit cards and mortgages; this made access of credit facilities with no restriction resulting to financial crisis.

Financial crisis of 2008 was caused by several factors which included the availability of cheap credit which was given by financial institutions, this caused the supply of money to increase in the market as a result the prices of goods and services increased this made inflation rate to increase.

As there was easy access to credit the supply curve shifted from AS1 to AS2 as shown above and since the demand is constant prices increases from P1 to P2 and as a result production decreases this led to the financial crisis.  In the aftermath of the crisis where the governments intervened by bailing out the financial institutions and they controlled credit by put proper rules and regulation in which the financial institutions can follow the supply of money was cut and as a result the economy return back to normal by reducing inflation and increasing production.

As the world experienced the 2007-2008 financial crisis the rate of unemployment was high and labor was in surplus. During recession production is low and a lot of people lose their jobs this make unemployment rate to increase as a result the inflation rate is low.

After the crisis the economy starts to grow, this make the aggregate demand to increase leading to increase in employment. At first there will be little pressure for a rise in wages but as the economy grows and production increases more people will be employed and as a result the wages will increase, leading to increase in cost of production which in turn leads to increase in prices hence increase in inflation.

Balance of Trade

Balance of trade is the difference between the countries imports and exports, if the imports are greater than the exports then the balance of trade is negative but it is positive if the exports exceeds the imports. The financial crisis affected much the balance of trade of several countries, for example since the production of countries decreased due to the financial crisis the countries were not able to produce enough to export this affected the balance of trade greatly. Also countries were not import to import goods and services because production was low and the prices were high.

Balance of trade (BOT) = exports (E) - imports (I)

Financial crisis affected much the exchange rates of countries, in developing and emerging countries the exchange rate were affected greatly most of this cut from using the US dollar since they were not carrying out many imports and exports because of the financial crisis. Also, developed markets were affected as their production had decreased hence their exports to emerging markets were reduced. Emerging markets restricted their importation so as to encourage local production this also lead to changes in exchange rate of these countries.

Loanable funds are used to determine nominal rate of interest by finding the interaction of supply of loanable funds and the demand of loanable funds. By keeping the supply of loanable funds the same, an increase in demand of loanable fund leads to a rise in interest rate while maintain demand of loanable funds the same, an increase in supply of  loanable funds leads to decrease in interest rate. This caused the financial crisis and after the governments intervened by set the credit rules and regulation the interest rate were able to be maintained at the reasonable rate.

Conclusion

The 2008 financial crisis was one of the most difficult period that economies passed, the inflation rates were so high, production decreased and unemployment rates were so high but several strategies were laid out by different government which included bailing out financial institutions and putting down proper rules and regulations to govern credit sector and in return the economies have been able to recover well. Employment rates have started increasing and interest rate and inflation are being kept at reasonable levels as a result production has increased.

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