Question

1. Based on the functions of the banking system, give reasons why governments bail out banks during an economic crisis?
2. Is the World heading for a recession? Explain the conditions under which the world can be classified as being in a recession as COVID-19 persists. Explain linking the pandemic to the various stages of a recession.

Answer 1

Reasons for bailout of banks during crisis:

During crisis few people failed to pay off mortgages, this will affect the other customers. It will continue like a chain. So the banks introduce attractive policies to reduce this.

Supporting the banks help the rest of the world. By providing this support financial support ca provides more loans to the needy during the crisis. But during this period bank have less capacity to provide loans. When government provide support will encourage he investors.

The collapse of banking hurts the individual citizens. There are several pension policies and other savings were handled by these banks. I such situation the government should ensure the survival if financial institutions.

The government money is inevitable at this situation to maintain the risk faced by the global economy.

At this present situation world moving towards a huge financial crisis. There is a low rate of GDP in our economy, income and huge unemployment created through this lockdown and pandemic. Our economy is now in the recession stage. There is a huge fall in the demand for goods and services. Producers not concerned about the fall in demand, this create excess supply in the market. Gradually we are going to the stage of depression. All the positive indicators like income, output, wages etc. are falling down. The economic growth falls below the steady state growth.