ECO201A: Bachelor of Business
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Laureate International Universities
ECO201A Economics (ECO201A)
Added on 2020-04-21
ECO201A: Bachelor of Business
Laureate International Universities
ECO201A Economics (ECO201A)
Added on 2020-04-21
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Running Head: ECONOMICSEconomicsName of the StudentName of the UniversityAuthor note
1ECONOMICSTable of ContentsAnswer 1..........................................................................................................................................2Answer 2..........................................................................................................................................3Answer 6..........................................................................................................................................7References......................................................................................................................................10
2ECONOMICSAnswer 1The Global Financial crisis that started from July 2007 had fully explored in 2008. Themain driving factor for the financial crisis was credit crunch happened in housing market. Duringthis time, the US investors lose their confidence. The US economy suffered with a liquidity crisisas resulted from reduced value of sub-prime mortgages. To counter the crisis US governmentinjected a considerable amount of money in the financial sector. In September 2008, the crisistook a disastrous form as the stock market crashed and high volatility is observed globally(Treeck 2014). Not only investors but also the consumers lose their confidence and restrict theirchoices. The Global Financial Crisis originated in the US housing market. The homeowners in UShad withdrawn their subprime loans because it becomes difficult for them to repay themortgages. With declining price of houses, they find themselves in huge debt. There is largenumber of loan defaulters that put banks and financial institution in trouble. The valuation ofland decreases as compared to the valuation when loans are given (Paulson 2013). Bankssuffered from a liquidity crisis. Following the housing bubble burst lending or receiving loanbecame extremely difficult. The liquidity crisis in the economy is known as credit crunch. United State is one of largest economy in the world. It maintains economic relation withmany other nations worldwide. The financial crisis in US spread internationally and countrieswent through a recessionary crisis. There were foreign banks that bought US collateralized debt.In times of financial crisis in part of these loans were transformed into collateral debt obligations.The financial institutions across the world participated in the debt transactions. For example,many European and British banks had exposed to the mortgage loans. With increasing loan
3ECONOMICSdefaulters in US theses banks suffered a huge money loss (Bekaert et al. 2014). The bankingsystem in US is connected internationally. In the phase of losing money banks limit their lendingto others. When banks restricted lending to each other there occurred a supply shortage of fundsand firms and consumers and firms find it difficult to lend money from banks. The reducedsupply of money was responsible for a declining aggregate demand (Helleiner 2014). As a result,countries those were not directly related to subprime mortgages in US housing market sufferedfrom the crisis. US maintain a trade relation with many other countries. The recession in UScaused a fall in their import demand. This affected the export demand of nations and exportingcountries contracted with recession in US. The reduced volume of global trade makes thefinancial crisis a global phenomenon. The crisis in financial sector reduced the confidence offirms and consumers resulting in a global crisis. The global stock market was severely affectedby the financial crisis (Özmen and Yaşar 2016). Declining share price means lower wealth andreduced confidence leads to lower growth. The Global Financial Crisis in 2008 could have been prevented if Federal Reserve did notignore the early signs and take active steps at the beginning of the crisis. The lending indicatorsfirst signaled trouble in November 2006. Then the commerce department reported a drop inhome permits by 28 percent. However, then Fed did not believe that housing price could fall. Fedthen remained optimistic and believed on the strength of domestic economy to counter housingprice slump (Godlewski 2014). If government intervenes at the early stage then U.S. and rest ofworld could be saved from the crisis. Answer 2Bank rate is the interest rate that central bank charges to the commercial bank onborrowed fund. The Bank rate in Australia and New Zealand is knows as official cash rate. This
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