Global Financial Crisis of 2007: Reasons and Impacts

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ECONOMICS ASSIGNMENT
ECONOMICS FOR MANAGERS

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Executive summary
The recession of 2007 was one of the biggest economic shocks in the world after the great
depression of 1929. The effects of recession spread across the US border to hit different
countries of the world. Some of the countries have not been able to bounce back from the
shock it had experienced. This paper discusses the main reason underneath the global
financial crisis of 2007. The study answers some of the questions and through that, it
discusses the reason for the global crisis.

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Contents
Introduction................................................................................................................................3
Question 1..................................................................................................................................3
Question 2..................................................................................................................................4
Question 3..................................................................................................................................5
Question 4..................................................................................................................................5
Question 5..................................................................................................................................6
Question 6..................................................................................................................................7
Question 7..................................................................................................................................7
Conclusion and recommendations.............................................................................................8
Reference....................................................................................................................................9

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Introduction
Economic depression is known as the phase when the global or national production of the
economy is low owing to the low aggregate demand for goods and services in the market. In
this phase, the unemployment reduces along with production that is not desirable for
economic growth and development. One such economic downturn of this century was the
global financial crisis of the year 2007. The objective of the paper is to discuss the reasons
underneath the global recession that contracted global production in all parts of the world.
The paper will approach the study question by answering a few questions that will lead to the
debate regarding the cause of the global financial crisis of 2007.
Question 1
a) Debt contracts increase the burden for the customers who take mortgages from the bank.
The banks do not incorporate the factor of reduction in the value of the property and hence
this burden is passed on to the customers.
Figure 1: The changes in demand and supply due to externality
(Source: Taillard, 2019)
The figure above shows the standard demand and supply for the mortgages. In this market,
the bank does not incorporate the burden on the customers (Wu, 2015). If the burden is