Question

To answer the following questions, students should use a sum of relevant economic theories

(if require) for the justification of their answers. Students can also use figures (i.e., supply

and demand curves) for presenting their answers.

Consider the financial crisis 2007-2009 in USA.

Now, assume that the crisis has been continuing for 10 years. We call this period as a long

run period.

1. Explain the effect of this crisis on USA's GDP in long-run?

2. Explain the effect of this crisis on USA's inflation rate in long-run?

3. Explain the effect of this crisis on USA's labour market in long-run?

Answer 1

*Answer:

The financial crisis 2007-2009 in USA came into existence because of the crisis in the subprime mortgage market in the US. The crisis grew into a full grown international banking crisis after the collapse of the Lehman brothers bank. This led to a long term shock to the US economy and the other interlinked economies. The Housing market and the banking markets were the two main markets that crashed during the crisis. This was because people took a lot of loan from the bank in name of housing loan and could not repay back and the banks fell into debt. The whole world was taken back by the crisis news and the Asian markets markets reacted and volatilized immediately.

1. If the crisis is being carried for 10 years, the GDP of the US would decline for two or more consecutive quarters and then the economy would stabilize as the situations improve. In the long run GDP would not be affected much because of the crisis.

2. The effect of this crisis on USA’s inflation rate in long-run has not been much severe. This is because inflation rate depends very much on peoples expectations of the future rate. And if we look at US case, peoples expectations have not been very high and thus the effect on inflation has been temporary.

3. The long run impact of crisis on the labor market is that it leads to skyrocekting unemployment rates. A lot of people loose their jobs and never get back permanent jobs and this is because of the problem of belief that the people hold. Thus, the labor market is most affected by the crisis and people don't have secure jobs anymore.

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