Question

Discuss the implications that the 2008 recession ( that originated in the US) had on UK

1. Elaborate very briefly on the specific aspects of the event that you are going to examine. Assemble your facts and your evidence. What policies or other factors which helped precipitate the situation in UK

2. Map the event into a “shock” and trace the shock in one of the model diagrams you learned, discussing its macroeconomic consequences within the framework chosen. You may assume that the economy starts off in both short-run and long-run equilibrium.

3. Assess the government policy response, showing what the end impact was. Describe briefly what was actually done in practice, then represent it on a diagram.

(Step 1 – Place the macroeconomy in short- and long-run equilibrium.

Step 2 – Demonstrate the impact of the macroeconomic shock on the economy in the short run.

Step 3 – Demonstrate the impact of the policy response on the macroeconomy in the short-run.

Step 4 – Show the long run equilibrium of the economy after the initial shock and the policy response. Trace and explain this path on a diagram summarizing one of IS-LM MODELS )

4. Discuss the implications of the crisis for one set of individuals (for instance, households in that situation, a certain age group of the population, etc., certain groups of workers) and businesses (a specific firm or sector, your business sector or firm, etc.)

Answer 1

1. Economic recession refers to economic slowdown between 2008- 2013 especially. US economy was facing problems of unemployment. Euro zone also experienced a double dip recession and high unemployment. Due to global business and demand slowdown saving rate rose in UK from 0% to 7% in a short space of time. Due to liquidity trap investments and borrowings did not increase and also productivity went down and created more unemployment too. Also a fact that UK economy is still reliant on exports to Europe and a continued EU recession is a factor in slowing UK growth.

2. As shown below, aggregate demand shifting to left from AD1 to AD2 due to decrease in confidence amongst people and businesspersons. Average prices come down from Pf to Pe and real GDP comes down from Yf to Ye. This will also mean that unemployment goes down. However as wages are sticky and prices are hard to negotiate average price levels may not come down as expected.

3. During an deflationary level, govt. can adopt expansionary fiscal policy(lowering tax rates and increasing govt. spending) and central bank can have expansionary monetary policy ( lowering interest rates and increasing money supply ). This will help to shift AD2 back to AD1. Covering economic gap between Ye and Yf as shown above.This is precisely what UK did. They decreased interest rates and also reduced business taxes to promote investments. However it had limited success due to global slowdown and mainly Eurozone debt crisis.

4.This especially impacted the youth and business people. The feeling of protectionism grew and ended in Brexit. There is already a feeling among youth to stop refugees coming to protect jobs. Now many business men may shift plants outside UK t enjoy tax concessions offered to them when it was art of European union.