MANAGEMANT
Introduction
The situations whereby the financial assets gradually change losing a great part of the normality is known as a financial crisis, and a good example is an economic recession in 2007-2009 united states economic crisis. The financial crisis affects all the sectors of the economy, the employment, the production level of industries, and the gross domestic product. Some policies, as discussed by the study, are employed to combat the financial crisis, which includes the monetary policy approach, which involves the increase of the interest rates, reducing the federal reserves, and buying and selling of treasury bonds. Here also, the fiscal policies approach, which consists of the government spending to combat the crisis like reducing or increasing the tax and increasing or reducing government spending.
The origin, the reasons and breadth and the markets involved during the crisis
The financial crisis in 2007-2009 originated in the United States due to the supreme crisis. Here customers were given home loans without verifying the documents correctly, and also the banks did take papers of the property as security deposits. Here clients did not bother to clear the loan, which later assets revolved to none accomplishment. The economic market and the banks in the USA collided due to the high number of assets that did not perform and because they were unable to recover the amount of loan. Many jobs were lost, and the level of unemployment rose. Also, the GDP dropped down rapidly due to the low demand for automobiles, hotels and the tourism industry drawing on (Helleiner, 2011). The financial crises in the USA and the likely slowdown influenced other countries like India and the UK since these countries projects in the IT part and products they traded to the US market. The nations that depended on the US market for trading were significantly influenced. At this point, some of the markets were significantly affected by the recession of the US market include the IT sector since most of the IT industries outsourced from the US, and the airline’s sector was hit significantly since many people dropped their expenditure for luxury. Also, the automobile sector and hospitality industries were hit considerably.
The impact USA’s GDP in the long-run crisis
The cost of monetary that measures total finished products and the services made in a nation with a definite time period is known as GDP. Therefore a crisis in the United States will significantly influence the cost of final products and services in the United States since GDP measures the level of the country’s economic growth rate.
The financial crisis dated 10 years, which is the long run, would substantially have an effect on the (GDP). The financial crisis causes the level of the GDP to drop significantly, whereby the demand amassed dropped down greatly. The manufactures would produce fewer products and services due to the decreased rate of demand by the consumers and the drop in purchasing power by the consumers. And as a result, the Gross Domestic Product dropped in the long run. The GDP would decrease significantly due to the cutting of the potential labor force by the industries due to the low demand for the products. The industries would do lay off workers to reduce the cost of operation. Due to the financial crisis, in the long run, it would have effects on the job and income losses having lasting consequences on the families, therefore, lowering the standards s of living. At this point, the GDP would be drop significantly due to job losses.
The influence of USA’s inflation rate in long-run crisis
The increase in values of goods and services over a while is known as inflation. Consequently, in the long run, the inflation in the USA would affect the cost of the commodities, the production of commodities, the demand of the products, and the purchasing power of the consumes would decrease; therefore, the economy would be greatly be affected by the inflation. The effect o on the USA’s increased values of commodities due to financial crisis, in the long run, is that the value of the product rises significantly, causing hyperinflation. Hyperinflation is identified as a type of inflation whereby inflation erodes the real value of the local currency as the costs of goods and services rise significantly. At this point, manufacturers lower production capacity due to less demand for the products; therefore, due to the insufficiency of the goods and the services in the marketplace leads to the commodity process significantly increasing. The long-run effect of the financial crisis would lead to hyperinflation (Helleiner, 2011). Here the long run of the financial predicament would lead to consumer’s inability to purchase goods, and the services due to their prices significantly increasing the industries would start closing down due to low demand for the products.
The influence USA’s labour market in long-run crisis
The labor market would have significant effects on the financial crisis, whereby the unemployment level will be very high. At this point, the long-run financial crisis hit the employment market, whereby the firms would start laying off their employees to reduce the cost of labor in the industries. And this is correlated with the little demand for products and services in the market; therefore, the business and the industries will automatically start producing fewer products and services. Since many people will have been laid off, therefore, there will be a lot of jobless people in the employment market. The long-run financial crisis will lead to a great unemployment level in the United States since the combination of new labor market entrants, and the job losers who look for employment leads to many cases of the significant rise of the unemployment rate. Also, as many people lose their jobs, other people are looking for jobs, and these results into an increase in the rates of unemployment. The long-run recession would lead to a rise in unemployment as the job losses continue to increase, and the inflow rates start declining; hence the companies and the business will stop employing or take in fewer employees.
The influence levels of Americans’ consumption in the long-run crisis
The consumption and purchasing function in a country is determined by the household’s disposable income and wealth. The significant effect on the level of consumption of the consumers of goods and services is due to the long-run financial crisis in the United States. At this point, many of the consumers will have the low purchasing power to buy the products and services offered by the industries; hence the prices of the goods and services will have increased significantly. The demands of the goods and the services will be very low since many of the consumers would not afford to purchase. Also, due to fewer needs of goods and services, the industries and companies will reduce capacity production; therefore, the consumer’s ability to buy will be meager. In addition to the effect of the long-run crisis on the consumption of goods and services, the majority of the people will have no jobs; therefore, this will translate to them having less income. At this point, this will lead to a majority of the consumers in the United States decreased significantly ability to purchase goods and services, therefore, the long-run financial crisis in the United States will lead to an increase in the level of poverty, thus the inability to buy products and services.
The end product on the levels of USA’s investment in long-run crisis
Industries are identified to be innovative if they introduce a new product or a good in the market. And when a firm suffers from a financial crisis, it will reduce the investment expenditure. Here the long-run economic turmoil in the long-run will affect the investments negatively in the United States since many institutions and industries are continuously making losses. The institutional investors like insurance firms, pension funds banks, and money managers will turn away from a finical crisis economy. They will run away since they aim to make profits is not met, and also many investors will shy away from a failing economy. The investors would get worried about the prices of the stocks falling and their portfolio influences. Due to an increase in the level of unemployment and the economic output shrinking and the drop in consumer spending and the stock prices naturally drop, the investors react very fast, whereby they pull their money out totally. Investor aims to make a profit, and when they realize that the economy is failing, they shy away and withdraws their investment in the USA to go and look for other places to invest. Therefore long-run financial crisis in the USA will lead to loss of investors, and this leads to industries and businesses shrinking since they make losses due to low consumer spending and high rates of unemployment.
The influence of the USA government’s Budget in long-run crisis
The long-run financial crisis in the United States leads to domestic revenue of the Budget will not be archived due to a decline in economic activities. Whereby many investors who contribute largely to government revenue collection will start withdrawing their investments, less consumer spending where the government collects value-added tax will significantly decrease. The industries will be closing down due to frequently making losses since the demand for the products by consumers is deficient due to an increase in the level of unemployment. Also, inflation in the United States will lead to an increase in the government budget deficit. At this point, the government budget will have a deficit that will continue to widen since the revenue collection will significantly be decreasing. Also, the government budget will be affected, whereby they will increase spending than the revenues since the government have been collecting fewer taxes. The government will increase the debts to cover the deficits on their budgets, therefore, increasing national debt this will lead to the government increasing in expenditure to be able to revive the failing business and industries. Consequently, the long-run financial crisis will lead to deficits in government budgets and an increase in debts due to borrowing and an increase in government expenditure.
The policies USA’s government and central bank would employ to recover the crisis through changing macroeconomic variables
To be able to improve from the long-run financial crisis in the US, we need to employ several polices like monetary policies and fiscal policies. Monetary policy involves the central bank’s acts to regulate the money quantity in the economy. The money supply comprises of all forms of money market mutual funds checks, and cash especially the bonds and the loans. The fiscal policy is using government expenditure and policies in tax to affect the economic situations; particularly the macroeconomic conditions (Sims, 2016). Therefore lowering and raising the rates of interests is essential in controlling economic growth. Each country has its rate of interest to determine the number of saving and the number of investments. To be able to bring down this crisis, the central bank would attempt to lower the rates of inflation and try to stabilize. Since the rates of inflation in the US were very high, the central bank will increase the rates of interest slowly, which will significantly discourage borrowing.
Open market operation is a vital tool to control the crisis in the United States, and here it involves buying and selling of treasury bonds in an open market. The crucial role of this policy is to control and influence the interest rates in the (OMO) open market operations to decrease or increase the supply of money in the economy. In our case, the financial crises have increased the rate of inflation in the US economy; therefore, the Fed will be required to buy the treasury bonds to decrease the money supply by abolishing cash from the economy by exchanging of bonds. Also, if the Fed buys the treasury bonds, the interest rates decrease, and the prices will be significantly be increased.
Employing this technique of reducing the federal reserves will significantly reduce the financial crisis. Here a federal reserve has the capability adjust reserve requirements of the banks to identify the reserves level in the banks is required to hold comparison to the stated liabilities deposits. Based on the reserved required ratio, the banks are required to hold a percentage o the deposits that are specified in the vault cash worth the Federal Reserve banks in reference to (Kenc & Dibooglu, 2010).. At this point, to combat the crisis, the federal reserves must be reduced. For example, when the bank’s deposits are $ 500, it gives $475, and the banks hold $25 since the Federal Reserve requirement is 5%.
To recover from the crisis, we need to reduce the tax rates. Although the federal government tax policy is generally used to generate revenue it places the burden on the people. However, reducing the tax burden for the people it will boost the economy by raising the purchasing power of the people whereby they can be able to spend. Gross Domestic Product (GNP) is equivalent to consumer spending; therefore, lowering the taxes will increase the disposable income, which will permit the consumer to spend more hence increasing the demand for goods, and these will lead to industries and businesses developing significantly.
The recovering of output gap of USA facing an expansionary gap during crisis
The USA can be able to recover from the output gap, also identified as the inflation gap, which develops when the economy’s actual Gross domestic Product level surpasses the possible real Gross Domestic Product. At this point, the consumers will have less purchasing power due to an increase in inflation and the over –employment resources. This kind of circumstance requires sensitive approaches to combat this crisis, which includes the contradictory monetary policies (increase the interest rates, selling the treasury bills, and increasing the federal reserves). Also, the contradictory fiscal policy approach used by the government can be used to combat this kind of condition, which includes increasing the taxes to ensure the purchasing power of consumer’s increases and the decrease the government expenditure and reduction in borrowing funds from the government. These policies will lower the demand for consumer’s products and services and also reducing the production until the inflationary gap is stopped. For example, the contradictory fiscal policies via upper rates of marginal tax and decreasing the government buying will lower the consumption and government spending. Therefore, this will decree the total demand and the real (GDP) until the possible outputs are produced hence recovering from the inflation gap.
The recovering USA ‘s output gap if it faces a contractionary gap during crisis
The USA can be able to recover from the contradictory gap, also identified as the deflationary gap first identifying how this Gap is reached. The contradictory difference occurs when the real economy Gross Domestic product is lower than the economies possible Gross Domestic Product. At this point, the deficiency would lead to underemployment of resources; hence these conditions need expansionary monetary policies whereby this includes rising the demand aggregate and economic development (Kenc & Dibooglu, 2010). . Here cutting of interest rates and increasing the supply of money to elevate the activities of the economy. Also, the expansionary fiscal policies which involve the expansion of the government supply of money in the economy through budgetary tools whereby the government either increases the expenditure or reduces the taxes leaving business and consumers with a lot of money for spending. This expansionary policy will increase the demand, therefore, increasing the production awaiting the possible capability. An example of an expansionary monetary policy includes if the interest rates are decreases, it will translate to an increase in demand and production, and therefore, increasing the expenditure in investments until the possible level of the economy gets back on its feet. I .e.the anticipated Gross Domestic Product.
Conclusion
Economist have come up with many theories on how the financial crisis can be developed and at the same time can be prevented. In our case the crisis in the United States was caused by the bank whereby the economic market and the banks in the USA collided due to the high number of assets that did not perform and because they were unable to recover the amount of loan. Many jobs were lost, and the level of unemployment rose. For example, to be able to improve from the long-run financial crisis in the US, the need to employ several polices like monetary policies and fiscal policies. Monetary policy involves the central bank’s acts to regulate the money quantity in the economy. The money supply comprises of all forms of money market mutual funds checks, and cash especially the bonds and the loans. The fiscal policy is using government expenditure and policies in tax to affect the economic situations; particularly the macroeconomic conditions
References
Helleiner, E. (2011). Understanding the 2007–2008 global financial crisis: Lessons for scholars of international political economy. Annual review of political science, 14, 67-87.
Kenc, T., & Dibooglu, S. (2010). The 2007–2009 financial crisis, global imbalances and capital flows: Implications for reform. Economic Systems, 34(1), 3-21.
Sims, C. A. (2016, August). Fiscal policy, monetary policy and central bank independence. In Kansas Citi Fed Jackson Hole Conference.