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The world financial crisis and recession aftermath - Assignment Example

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The world financial crisis and recession have had such an enormous impact in the global financial system. The onset of the financial crisis was precipitated by the eruption of the subprime mortgage crisis…
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The world financial crisis and recession aftermath
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Download file to see previous pages Due the financial crisis, the world economy include the United States went into deep recession that can be comparable into the Great Recession of the 1930s. According to research, in severe financial crises the crucial indicators such as housing prices and unemployment take longer to hit their lowest points. Several economic strategies have been proposed to tackle the financial crisis and resuscitate the global economy. One school of thought proposes that austerity measures should be taken to cut public expenditure in order to bring the global economy back on course. On the other hand, there are those who advocate for stimulus packages to jumpstart the economy through increased spending ability of the people. In evaluating the best course of action for handling the global recession, I would analyze the current situation based on the Keynesian economic theories. In his General Theory, Keynes renders an opposing view to the classical economic model in which the perfectly competitive markets with flexible measures resulted in self correcting and balancing measures. According to the orthodox doctrine, the Loanable Funds Theory played an important role in determining the interest rates. In this respect, consumption, saving and investment were all functions of the rate of interest. Thus, theory proposed that as long as the interest rate was sufficiently flexible savings automatically turned into investments. However, Keynes pointed out that consumption is a function of income. This implies that in as much the interest rates are flexible, the determinant factor for economic activity was the level of disposable income that individuals had. This argument is relevant to the policy debates concerning the most appropriate approach to the solving of the global financial crisis. I think that it is necessary to ensure that the ordinary citizen has disposable income in order to spur economic recovery. This means that governments should implement stimulus packages in a strategic way to make it possible for money flow in the economy. Use of austerity measures may not have the desired impact on the economies of the world. For instance, I believe that austerity measures may indeed put a cap on the government expenditures and create some control over money interest rates. However, this may only go as far as stagnation of the economy since people will still lack disposable income for consumption. Keynes also rejected the quantity theory of money. Keynes argued that the assumptions upon which the stable velocity held sway were invalid. Also, it should be noted that people hold on to money for a variety of reasons other than transactional purposes. In his money theory, Keynes pointed out that people may hold money as income deposits, business deposits and savings deposits. It is therefore imperative that if the quantity of money changes, then there will be equal changes in the general price level. This implies that the general state of the economy is affected by the amount of money in circulation. For economic growth, there should be sufficient industrial money circulation. Suffice to say, only stimulus packages can pump in money to the economy. On the other hand, austerity measures lead to reduction of the amount of money that is in circulation. The intention of governments worldwide is to move their economies to the path of growth therefore it is imperative that economic policies taken should ensure that there is more money in the economy. The concept of multiplier effect is a major tool that can be used to help governments to maintain high levels of employment even during times of economic depressions. According to Keynesian economics, the multiplier effect can be used by governments to attain a level of national level of income that would ...Download file to see next pagesRead More
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