--%>
Assignment Help - homework help

Financial crisis in United States

Question 1:

The financial crisis that hit the United States first and then the world economy starting in fall 2007 meant that the future prospects of many firms looked gloomy at best for some time. Comment on the effect of a recession on the investment curve (only) and on the level of savings, investment, and the equilibrium real interest rate. Show your answer using a graph.

Answer

As the future prospect for economies worldwide did not look good, there was a dip in the business confidence. What this means is that businesses were not looking to make more investment, given the pessimist view of the demand in future. Therefore, at existing level of interest rate, there will be lesser demand for investment. This is shown by a downward shift of the investment demand curve from I0 to I1 in the graph below.

On the consumers' side, a dim future prospect for the economy would lead to less consumption today and more savings. This is because of the fact people do not expect to earn more in the future due to slowdown in the economy. Therefore, in order to compensate for the expected fall in earning tomorrow, consumers save more today.

If we combine these two facts, then we see that both, the aggregate demand and the investments demand, in the economy will fall. This will mean that the demand for money will fall down as the transaction demand for money decreases. Given the fixed money supply, it will imply that there is excess supply of money in the market and hence there will be afall in the interest rate.

 

1549_equilibrium real interest rate.png

   Related Questions in International Economics

  • Q : Kind of exchange rate State which kind

    State which kind of exchange rate has no official intervention in foreign exchange market? How it is recognized?

    		•
  • Q : Problem on International trade economy

    If the Chinese economy could create all goods with fewer resources per unit than are needed in US, the citizens of China would: (i) Encompass a comparative advantage in the whole thing. (ii) Be self-sufficient since there would be no potential profits from trade. (iii

    		•
  • Q : State the two sources of demand of

    State the two sources of demand of foreign exchange: Import of services and goods and to acquire education in abroad.

    		•
  • Q : Techniques what are the techniques of

    what are the techniques of balance of payment?

    		•
  • Q : Define foreign exchange Define foreign

    Define foreign exchange: It is the currency other than domestic currency.

    		•
  • Q : Macroeconomic adjustment and EMU The

    The practice considers the Treasury’s elucidation of the consequence on macroeconomic adjustment of joining the euro.

    		•
  • Q : Gain from specialization and exchange

    If a Hawaiian can produce 50 bushels of either potatoes or pineapples per acre, whereas an Idahoan manages just 3 bushels of pineapples or 30 bushels of potatoes per acre, then: (1) Idaho’s absolute drawbacks prevent gains from specialization and exchange. (2) T

    		•
  • Q : Problem on completely employed economy

    In a completely employed economy, the higher the yield of capital goods, and the bigger its: (1) Present living standards. (2) Present output of consumer goods. (3) Growth of capacity for the future production. (4) Rates of inflation and unemployment.

    		•
  • Q : Circular Flow model of a private economy

    The simple circular flow model of a private economy describes how income and resources flow among: (1) Households and business associations. (2) Corporations and government agencies. (3) Sole corporations and proprietorship (4) Business associations a

    		•
  • Q : Economic environment in Australia and

    Explain the Economic environment in Australia and Internationally and their factors which affect them?

    		•