ECO201A Economics Case Study: Analyzing the Global Financial Crisis

This economics case study examines the global financial crisis that originated in the United States in 2007 and its widespread impact on global economies. It discusses the causes of the crisis, including the subprime mortgage crisis and the bursting of the housing bubble, as well as the responses of governments and central banks. The study further analyzes the implications of economic slowdowns and government debt, using the Greek debt crisis as an example. Finally, it explores the economic relationship between Australia and China, highlighting the trade and investment ties between the two countries and the potential impacts of China's economic policies on Australia. This assignment provides a comprehensive overview of key economic concepts and their real-world applications. Desklib provides a platform to access similar solved assignments and past papers for students.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 3..........................................................................................................................................4
Answer 6..........................................................................................................................................6
References......................................................................................................................................10

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Answer 1
Over the years, the economic scenario in the global framework has experienced
significant dynamics, which had both negative as well as positive implications on the economic
patterns across the world. One such economic phenomenon, which had immense effects (mostly
negative ones) on almost all the significant economies of the world, is the Global Financial Crisis
(Birdsall, 2012). The Global Financial Crisis, mainly had its initiation from July 2007, in the
United States of America and by 2008, the Crisis expanded on the economics in full strength.
In that period, due to the loss of confidence of the investors in the USA, the country
suffered from a huge liquidity crisis. This in turn led to reduction of the valuations of the sub-
prime mortgages, to counter which the governing authority of the country went to inject money
in the monetary sector of the economy (Shiller, 2012). The crisis expanded devastatingly in
September 2008, leading to the crash of the entire stock market, which had huge repercussion not
only on the economy of the country itself, but also almost on all the global economies, the effects
being more significant on the investment and financial sectors of the economies.
The huge crisis originally initiated in the housing market of the USA. The primary reason
behind the same was the huge amount of withdrawal of the sub-prime loans by the homeowners
(investors as well as households) as repaying the mortgages became increasingly difficult for
them due to the continuously increasing cost of the same (Tridico, 2012). This was the
consequence of the fall in the prices of the houses, which was wrongly speculated to be
continually increasing by the investors. This fall in price led the investors to a situation of acute
debt, which in turn led to considerable numbers of defaults, thereby increasing the trouble of the
banking and the financial institutions. The banks fell in the trap of acute liquidity crisis. The

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housing bubble burst in the economy has immense implications on the economy as it was
accompanied by a huge credit crunch (Kamin & DeMarco, 2012).
The USA being the most significant and most influential economy in the world, any
turmoil in the economy itself is expected to create huge implications on the other global
economies as they are all connected directly or indirectly with the country. Thus, in the given
scenario also, the financial crisis, which originated in the USA spread fast globally and had
immense negative impacts on many other economies of the world as they went into an acute
recessionary situation (Gieve & Provost, 2012). The USA used to receive collateralized debts
from the banks of other countries, which during this period were transformed partially into
collateral debt obligations of the concerned country, thereby worsening the situation even more.
As the banks and the financial institutions all over the world were involved in inter-country debt
transactions and were exposed significantly to the mortgage loans mechanism, therefore, with the
crisis cropping up and the continually increasing numbers of loan defaulters in the economy of
the USA, these banks also started incurring huge monetary losses (McCarty, Poole & Rosenthal,
2013).
The banking systems of the countries across the world being well integrated, in response
to financial losses the bank tend to restrict the lending activities considerably. Therefore, in this
situations, the banks also responded by limiting the loans given to each other, which in turn led
to the creation of a huge shortage of supply of funds, which not only had adverse impacts on the
investors but also on the firms and the households as lending was no longer easy for them. This
is turn reduced the aggregate demand in the economy to a huge extent. This led to immense
sufferings on part of the USA as well as those countries which were not directly linked to the
crisis. The export demand as well as the quantity of exports of many countries experienced a

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downturn as the crisis also affected their trade relations with the USA. This in turn reduced the
global trade volume, thereby making the financial crisis a global one. The international stock
market, experienced huge losses in face of the Global Financial Crisis, which had long term
affects the global economic scenario.
The huge negative phenomenon, however, could have been prevented from the very first
had the Federal Reserve of the USA taken the signs of the oncoming of such a crisis into account
and had the same taken proper precautionary actions. The first signal of trouble came from the
lending indicators as early as in November 2006, with the reported drop of home permit by 28
percent (Fratzscher, 2012). However, the over-optimistic behavior of the Fed, regarding the
housing prices in the country and their over-confidence on the strength of the economy to
combat any crisis led to the creation of the crisis itself. Thus, it can be asserted that the
intervention of the USA government in the early stage of the crisis itself.
Answer 3
Economic slowdown can be defined as the economic phenomenon of slowdown of the
economic activities in a country in a particular period of time. This is usually indicated by the
decrease in the GDP of the economy. The slow-down of an economy, if extended for a prolonged
period can lead to the creation of a recessionary situation in the economy (Constantinescu,
Mattoo & Ruta, 2015).
The slow-down of an economy leads to the creation of stagnancy in the productive
activities of the manufacturing and industrial units of the country, which in turn leads to a
decrease in the aggregate demand as well as aggregate supply in the economy. Thus, in face of

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the decrease in the productivity as well as demand, often to facilitate increase in the same the
government needs to take expansionary fiscal as well as monetary policies. For the purpose of
that, to allocate the required funds, the government needs to take debts from external sources
(Mankiw, 2014).
However, though there are positive several positive implications of debt financing on part
of the government, the borrowings on part of the government can create several problems in the
economy, especially in those economies where a recessionary situation prevails. The problems of
high government debt includes higher debt payment of interests, hike in the taxes and also
crowding out effects in the private sector of the economy, which can lead to immense sufferings
for the households as well as the investors. The presence of debt can also lead to an upward
pressure in inflationary aspects of the economy (Denis & McKeon, 2012).
Presence of government debt, usually gives rise to several problems in the economy as a
whole. However, in many cases the government of a country, tries to deal with high debt by
printing money, which in turn increases the supply of money, thereby causing inflationary
situation in the economy, which becomes painful for the economy as a whole and becomes a
national problem (Mande, Park & Son, 2012).
One of the recent examples of severe effects of government debt on the overall economy
is the debt crisis, which cropped up in Greece, which was the aftermath of the financial crisis of
the economy in 2007-2008. The huge crisis of debt in the country had huge implications on the
economy, which required bailout loans in 2010, 2012 and even if 2015 (Armingeon & Baccaro,
2012).

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The economy of Australia has considerable amount of government debt in the recent
periods, which have been growing in the recent periods. However, the growth of the economy
and its credibility in the investment and share market indicates that the current debt situation of
the country is not a scenario to be worried for. However, this being an aspect of uncertainty, the
government needs to keep a vigilant eye to prevent government debt becoming a bothering one.
Answer 6
The economy of Australia has emerged as one of the most influential economies in the
global scenario and over the years has shown impressive trends in aspects of economic
development, growth and trade scenarios. The country has, over the years, developed robust
trade relations with almost all the other economies in the global scenario, one of the significant
ones being China. Being one of the global economic giants itself, China is one of the fastest
growing global economies, with significant dynamics in the urban infrastructural and overall
industrial sector (Dyster & Meredith, 2012).
China, for the purpose of growth in the overall infrastructural framework, demands
considerable amount of raw materials, building materials and other drivers of growth like
electricity and transport infrastructures. These demands of the economy can be catered to by the
economy of Australia as the latter enjoys immense comparative advantages in the production and
export of the above-mentioned products and services (Shambaugh, 2013). On the other hand,
Australia also poses as an extensive market for the manufactured products, which are exported
by China. This bi-lateral robust transaction pathway has contributed significantly in the
development of a strong and long term commercial relation between the two countries.

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In the contemporary period, China is considered to be one of the primary and probably
the largest commercial partners of Australia and both the countries enjoy significant import-
export relationship with each other. Australia ranks as the sixth largest commercial partner of
China, importing as high as twenty five percent of all the manufactured products from the
country and exporting almost thirteen percent of thermal coal to the country. However, the
relation between China and Australia is not however confined only to imports and exports. Apart
from the import export activities, both the countries are also connected to one another in terms of
investments and flow of capitals. One of the largest source of the Foreign Direct Investments of
Australia, in the recent years (third largest specifically) is China. China makes almost 3% of the
total investment in Australia as FDI and the sector in which most of the investments of the
country flows primarily is the infrastructural sector, with China being specifically interested in
investing in the infrastructural projects taken up in Australia (Schandl & West, 2012).
From the above discussion, it can be asserted that there is significant presence of
commercial and investment relations between China and Australia, with the relation growing
consistently with time. Thus, any fluctuation or turmoil in the economy of China is expected to
have implications (positive as well as negative) on the economy of Australia itself. This pattern
can be observed from the times of economic boom experienced by China, which had immense
positive implications on the economy of Australia as the latter gained considerably from the
economic boom of the former. However, the cause and effect relationship of the countries also
have negative impacts on the economy of Australia as well (Ahuja & Nabar, 2012).
In the recent period, the economy of China has experienced considerable shift in their
policies of growth as the same shifted towards a consumer-oriented framework. This in turn, by
replacing the pro-producer policy framework, has resulted in a comparatively slower growth of

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the country’s economy. This in turn is expected to have negative impacts on the profitability of
the firms of Australia which supply their products to China. Though the slow-down of the
economy of China is expected to have its implications on almost all the global economies, the
same is expected to be more acute in case of Australia as they are more exposed to the economic,
investment and commercial policies of China. Not only is the latter one of the primary market for
Australia’s exports (with over 28% of its total exports going to China), but also one of the
primary source of investment in Australia’s infrastructural sector is China itself.
Australia exports coal, gold, copper and nickel ores and minerals to China. Due to the
slowing down of Chinese economy, the trade volume of Australia is expected to decline, which
in turn creates an excess supply of the same in the domestic economy, which in turn lowers the
price of these commodities. The domestic slowdown of China also leads to driving out of the
funds of the Chinese investors from the economy of Australia, which in turn, is expected to have
huge adverse negative impacts on the domestic economy (Reilly, 2012).
China was one of the primary benefactors of Australia during the Global Financial Crisis,
which helped the economy to prevent itself from sinking. While the demand for minerals and
metal ores of China kept the productivity of Australia high, the inflow of investment from the
former, especially in the real estate sector of the latter kept the housing prices of Australia more
or less stable (He, 2012).
The average rate of growth of China from 2000 to 2014 had been 9.75%, which
decreased considerably to 6.9% in 2015. The consumer-based growth of the country is also
expected to drive the growth even lower, which has led to decrease in the outflow of capital from
the economy, thereby creating uncertain situations in the economy of Australia.

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The mining and mineral sector of Australia is expected to be the worst hit of the
slowdown of the economy of China as the contracted demand of the latter directly affects the
export demand as well as the productivity and income generation of Australia.

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References
Ahuja, A., & Nabar, M. (2012). Investment-led growth in China: Global spillovers.
Armingeon, K., & Baccaro, L. (2012). Political economy of the sovereign debt crisis: The limits
of internal devaluation. Industrial Law Journal, 41(3), 254-275.
Birdsall, N. (2012). The Global Financial Crisis.
Constantinescu, C., Mattoo, A., & Ruta, M. (2015). The global trade slowdown: Cyclical or
structural? (No. 15-16). International Monetary Fund.
Denis, D. J., & McKeon, S. B. (2012). Debt financing and financial flexibility evidence from
proactive leverage increases. The Review of Financial Studies, 25(6), 1897-1929.
Dyster, B., & Meredith, D. (2012). Australia in the global economy: Continuity and change.
Cambridge University Press.
Fratzscher, M. (2012). Capital flows, push versus pull factors and the global financial
crisis. Journal of International Economics, 88(2), 341-356.
Gieve, J., & Provost, C. (2012). Ideas and coordination in policymaking: The financial crisis of
2007–2009. Governance, 25(1), 61-77.
He, B. (2012). Politics of Accommodation of the Rise of China: the case of Australia. Journal of
Contemporary China, 21(73), 53-70.
Kamin, S. B., & DeMarco, L. P. (2012). How did a domestic housing slump turn into a global
financial crisis?. Journal of International Money and Finance, 31(1), 10-41.

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Mande, V., Park, Y. K., & Son, M. (2012). Equity or debt financing: does good corporate
governance matter?. Corporate Governance: An International Review, 20(2), 195-211.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
McCarty, N., Poole, K. T., & Rosenthal, H. (2013). Political Bubbles: Financial Crises and the
Failure of American Democracy. Princeton University Press.
Reilly, J. (2012). Counting on China? Australia’s strategic response to economic
interdependence. The Chinese Journal of International Politics, 5(4), 369-394.
Schandl, H., & West, J. (2012). Material flows and material productivity in China, Australia, and
Japan. Journal of Industrial Ecology, 16(3), 352-364.
Shambaugh, D. L. (2013). China goes global: The partial power (Vol. 111). Oxford: Oxford
University Press.
Shiller, R. J. (2012). The subprime solution: how today's global financial crisis happened, and
what to do about it. Princeton University Press.
Tridico, P. (2012). Financial crisis and global imbalances: its labour market origins and the
aftermath. Cambridge Journal of Economics, 36(1), 17-42.