Question

At times, the economy is subject to recessions at the same time that there is a financial crisis. Examples of this include the Global Financial Crisis in the United States and the worldwide Great Depression. Briefly discuss how does a financial crisis affect the macroeconomy?

Answer 1

Global Financial Crisis of 2008 had caused the fluctuation with the rate of poor employment and the production of essential goods and services fulfilling the economic needs in the society. Housing bubble is the issue formed as the initial problem of Global financial crisis affecting the good conditions of macro-economy in the structure of developed country of US. Housing bubble issue raised suddenly when the value of housing assets started to depreciate its value. This increased the burden of debt to all the people who advanced the loan who purchased the house with higher value before the period of crisis.

As Macroeconomic conditions deals with the aggregate status of all consumption and investment activities of all the people in the US nation. Sub-prime mortgage crisis derived from the problem of housing bubble in which people faced the issue of paying more interest to the bankers. The bankers on the other side has bankrupt funds through the full flow of funds circulating outside without any accumulation for the interest which it was lent for the business ventures as well for the individuals for the house financing. So this crisis affected globally all over the world with the critical macroeconomic effect.

Such crisis increased the level of inflation to the danger zone of the economy. This in turn decreased the possibility of liquidity of cash flow in the economy as well as the effects of low density of assets value with the liquidity of cash flow. The low level of cash liquidity made the banks to stop the activities of providing the loan advances. At this time the US Federal Government followed the policy of decreasing the nominal rate of interest below the zero level bond. The people can buy the bond and sell it against any special interest accrued to it at the time of maturity. Then was the condition of diabolical loops took place by restricting the savings and investments of the public to the reasonable level. The crisis has weaken the financial conditions of the banks. Same conditions also prevailed in the time of Great Depression in 1930s. Banks of 1930 period faced the problem of financial insecurity towards the critical condition of low level liquid level of savings and consumption pattern leading to low level of employment and the production of goods and services.