Question

a. How do you define economic and financial crisis? Are they the same?

b. Deliberate on the stock market crash in the US i.e. causes, impact, measures in tackling them.

c. What can you deduce about the link of capital market instruments with the economy?

Answer 1

a. Financial crisis is different from economic crisis. Financial crisis occurs when financial assets lose some of their nominal value. Economic crisis on the other hand could affect all the sectors in the economy. When an economy experiences a financial crisis, it could result into an economic crisis. Economic crisis is more dangerous than a financial crisis.

b. The stock market crash that happened in 1929 led to a collapse of stock prices. The stock market crash then developed into the Great Depression. There are many debates about what actually caused the crash. Some believe that the investors were overly confident which led to the stocks being overpriced. Almost everyone were affected because of this crash. Half of America's banks had failed and unemployment rose rapidly. There was also a decrease in the world trade and the economic growth plummeted. The government responded by cutting taxes and implemented infrastructure projects. The Reconstruction Finance Corporation was set up to lend money to banks and businesses to help them stay afloat.

c. Capital market instruments are very crucial for the economy. They help connect the money market with the real sector of an economy. The capital market instruments aid the economic development because they provide the businessmen with the funds needed to operate. The capital market instruments act as a link between those who supply capital and those who need it. They promote savings and investment in an economy thereby leading to growth of the economy.