Question

What are the common financial problems and solutions that every government (country) face during crises? Name and explain briefly.

Answer 1

There are several problems a country faces during financial and economic crisis. They could be as follows-

1. Contraction of the growth rate into the economy, which can lead to to demand and supply mismatch as demand will shrink and it will lead to the economy slowing down, subsequently leading to reduction in Gross Domestic product.

2. Financial crisis can also lead to devaluation of the the domestic currency against foreign currencies and that can lead to increase in trade deficit.

3. Financial crisis would also mean that there would be lower collection of taxes on the part of the government as there are not enough consumer disposable income so the tax collection would be lower and hence it would impact the physical deficit of the company and the fiscal deficit will enlarge.

4. Financial crisis can lead to a contraction in the entire economy which can impact various sectors of the economy and it can lead to job layoff from various companies leading to massive unemployment in the country.

5. Financial crisis can lead to political instability into a country because people want to change the government as economic condition has gone down as well as the disposable income has come down

Various solutions to problem arising out of financial crisis are as follows-

1. Quantitative easing-Central banks of the country can adopt quantitative easing policy in order to stimulate the demand in to the economy so that the contagion can be stopped and economy can be restabilized.

2.regular interventions are made by the central banks into the foreign currency market in order to defend the devaluation of the domestic currency.

3.massive stimulus and bailout programs are launched by the government in order to financially support the business organisation and various mergers and acquisitions are conducted by government in order to save various industries and reduce the level of unemployment.

4.direct as well as indirect taxe cuts are announced by government so that people are left with more of disposable income and it can help in generation of demand.