Question

【While evidence shows that the Global Financial Crisis (GFC) impacted firms (small to large), it is generally accepted (and shown by empirical studies) that the GFC predominantly impacted on households/consumer spending (i.e., on aggregate demand). Assume this is the case. Also assume that there is no fiscal policy response from the government.】

a. Explain and illustrate the short-run effect of the GFC on macroeconomic equilibrium using the AD-AS model. [0.5 marks]

b. Explain and illustrate the adjustment process to back to long-run equilibrium based 

on the following

i. Self-correcting mechanism (i.e., with no policy response). [1 mark]

ii. Active stabilisation response (i.e., with policy response). [1.5 marks]

Answer 1

The emergency started the Great Recession, which, at that point, was the most extreme worldwide downturn since the Great Depression.[13][14][15][16][17][18] It was likewise trailed by the European obligation emergency, which in Iceland and, comparative with the size of its economy, was the biggest monetary breakdown endured by any country in history.[19] It was among the five most noticeably terrible monetary emergencies the world had encountered and prompted a deficiency of more than $2 trillion from the worldwide economy.[20][21] U.S. home loan obligation comparative with GDP expanded from a normal of 46% during the 1990s to 73% during 2008, coming to $10.5 trillion.[22] The increment in real money out refinancings as home estimations rose, filled an increment in utilization that could at this point don't be supported when home costs declined.[23][24][25] Many monetary organizations claimed ventures whose worth depended on home loans, for example, contract upheld protections, or credit subordinates used to guarantee them against disappointment, which declined in esteem significantly.[26][27][28] The International Monetary Fund assessed that enormous U.S. furthermore, European banks lost more than $1 trillion on harmful resources and from terrible advances from January 2007 to September 2009.[29]

Absence of financial backer trust in bank dissolvability and decreases in credit accessibility prompted diving stock and ware costs in late 2008 and mid 2009.[30] The emergency quickly spread into a worldwide monetary stun, bringing about a few bank failures.[31] Economies overall eased back during this period since credit fixed and global exchange declined.[32] Housing markets endured and joblessness took off, bringing about expulsions and dispossessions. A few organizations failed.[33][34] From its top in the second quarter of 2007 at $64.4 trillion, family abundance in the United States fell $14 trillion, to $50.4 trillion before the finish of the principal quarter of 2009, bringing about a decrease in utilization, at that point a decrease in business investment.[35][36][37] In the final quarter of 2008, the quarter-over-quarter decrease in genuine GDP in the U.S. was 8.4%.[38] The U.S. joblessness rate crested at 10.0% in October 2009, the most noteworthy rate since 1983 and generally double the pre-emergency rate. The normal hours each work week declined to 33, the most minimal level since the public authority started gathering the information in 1964.[39][40]

The monetary emergency began in the U.S. yet, spread to the remainder of the world.[33] U.S. utilization represented in excess of 33% of the development in worldwide utilization somewhere in the range of 2000 and 2007 and the remainder of the world relied upon the U.S. customer as a wellspring of interest. Subordinates, for example, credit default trades likewise expanded the linkage between huge monetary establishments. The de-utilizing of monetary organizations, as resources were offered to take care of commitments that couldn't be renegotiated in frozen credit markets, further sped up the dissolvability emergency and caused a decline in global exchange. Decreases in the development paces of non-industrial nations were because of falls in exchange, item costs, venture and settlements sent from traveler laborers. This prompted a sensational ascent in the quantity of families living beneath the neediness line.[41] States with delicate political frameworks expected that financial backers from Western states would pull out their cash due to the crisis. In April 2012, Geir Haarde of Iceland turned into the solitary government official to be indicted because of the crisis.[59][60] Only one investor in the United States served prison time because of the emergency, Kareem Serageldin, a broker at Credit Suisse who was condemned to 30 months in prison and returned $25.6 million in remuneration at controlling bond costs to stow away $1 billion of losses.[61][58] No people in the United Kingdom were sentenced because of the crisis.[62][63] Goldman Sachs paid $550 million to settle extortion charges after supposedly expecting the emergency and offering poisonous ventures to its clients.[64]