Question

(a) Graphically using the IS-LM diagram and then intuitively, explain why did European countries refrain from using fiscal stimulus to combat the global economic crisis in 2008-10?

Answer 1

Global Financial Crisis:- A Global Financial Crisis is a financial crisis which has severely influenced many countries in 2007-08.
2008 Global Financial Crisis:- The Financial Crisis was primarily influenced by deregulation in the financial industry that allowed banks to engage in hedge fund trading with derivatives. Banks then demanded more to support the profitable sale debt. This created the financial crisis that led to the Great recession.
Fiscal Stimulus:- It refers to expand government consumption or decreasing taxes. It means growing the rate of growth of public debt, except that particularly Keynesian’s often assum the stimulus will cause sufficient economic growth.
Diagram-1
EU response to the 2008 economic crisis:- After the fall down of Lehman Brothers in September 2008, most European governments quickly adopted measures to support the financial system in a co-ordinated action. They took some remedies like increasing deposit insurance cuting, guarantees for bank liabilities.