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financial crisis

By Henry Hall,2014-12-08 18:28
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Introduction The world is going through a finacial crisis which caused by compalicate reasons.Million people suffer from it.The report focus on finding out the causes of the finacial crisis by using the macroeconmic theory as well as the real world data.And then I will give a brief introduction on the imapact of it both on how it influence the world and China..

Introduction

    The world is going through a finacial crisis which caused by compalicate reasons.Million people suffer from it.The report focus on finding out the causes of the finacial crisis by using the macroeconmic theory as well as the real world data.And then I will give a brief introduction on the imapact of it both on how it influence the world and China.

1.The causes and the impact of the finacial crisis

     (1)The cause of finacial crisis

    At very beginning,the worlds economic was experiencing a very

    prosperous time,it was stable and operate well.Therefore,there be a great deal of money surplus,clever people and the monetary institution will never ever let the money just stay in their pockets,they need to get more money to meet their greed.

    Now two choices for them to make,the first is buy the bond,the other one is lend money to the corporations and the public.Rather than to buy bond they would much likely to make loans.Because the bond rate is so low that they can not get any benefits.The money supply go up sharply,so the interest rate decrease,leading to the

     great incresse in the demand for loans.

    As we all know that America almost have deficit everyear,their borrowings are much more than the saving,as a result the bank cant

    offer enough money for loans.America try to seek other way to get the money to satisfy their ambitious.There is no thing better than the Global Financial Markets in which the money saved from all of the countries in the world.

    In 1999 the Investment banks and Depository banks allowed by law since 1999 to combine to do both types of business,so the money from the high saving region especially Asian countries get its

    way to the oversoending area.

    The investors make a great deal of money,they want the endless mortgages,but the guys with high credibility are limited,all of them already have the enough loans.But the investors are so desperate for more money,a high risky idea comes to their mind,they decide to give the loans to the poor or the low credibility guys with high interest rate so can make up for the hihg risk.

    The bank mixed the good and the bad debets togeter,make it

     look good and then throw it to the global finacial market,we name it Collateralised debt obligation (CDO).Because there are thounds of transactions so no body can pick the bad ones.

    The market operate with large amount of money and most of

    the consumers use the money to buy houses,leading the house price going up crazy high.

    The house holders feel they are very rich because of the high price. The high price of house encourage them to borrow and consume severals times as much as they did before.Eveyone is happy about the situation.

    Oneday the poor and low credibility guys loose their jobs and

     cant pay back the loans which with high interest rate.The bank loose money and stop loaning money.The bank cant get money from

    financial markets,and the bank stop lending to banks as well.So there come to the credit crunch!NO one can borrow to buy,no one can consume ,the senpending slows,and the house price decrease.While many people need to pay back the loadn,they get a negative equity,so

     the bank loose more money and they give up the houses,as a result,

    have to sell the house, but no one need house any more,so the house price go down sharply and further.

     Now, no money can be borrowed from other people, a lot of business have no money to maintain the operation.As we all know that the GDP of western countries are largely comes from the borrowing, with no doubt that the GDP decrease.That means people have lower income.

    The consumer lose confidence due to the bad economic situation, so they stop spending,the demand of every thing decline so leading a lot of business and factory go out, more and more people have lower wages and lose their jobs. The bad job market condition force the graduates to accept the lower salary,therefore they spend less and less.

    All these things like a circle, bank loose money and no longer lend money,people cant borrow money to sepend, bussines stop and

    workers get lower wages even loose jobs so they cut their spending,everyone get in trouble.

    All the satement above is the a simple sight of the casues of the finacial crises

(2)The impact of finacial crisis

     ?The unemployment will go up,and the income decline a lot.

     ?Price of house go down

     ?Consumers loose confidence

     ?The demand of investment go down

    Real data

    The financial crisis can not only limit the loaning activities, but also can affect peoples confidence, the United States will further reduce consumer spending, weaker business investment, export growth will

also slow down. According to the Statistical data, the major

    industrialized countries’ substantial economy is getting worse and worse. The activity index of American manufacturing only has 43.5 in September, which reached the lowest level since October 2001.(guiyu

    zhang, Oriental Management Research Center Deputy Director doctor of economics, Shanghai International Studies University)

    2.The relation between financial crisisa and the equation

    ,i) Y=C+C(Y-T)+I+G and I=I(Y01(+)(-)

    (1) Y=C+C(Y-T)+I+G 01

    According to the text book we know production Y(the left side) equal to the demand(the right side C+I+G ) and the demand depend on the income Y.The disposable money is the income minus the tax namely Y=Y-T.Crepresent how much people consume when D1

    additonal dollar disposable income increase.C means people need to 0

    consume the necessity for life even they have on increase in the diposable money.I is the investment while G is government spending.

    When the finacial crisis attack the world,peoples income reduce a

    lot because buiness and factories go out of work,so the unemployment increase, the bargain power go down leading the reduction of the income,so does the YPeople loose confidence so D.

    they may more likey to save money than to spend that means the C1 go down.In a word the C consumption decrease.The investment slow down because no money can be borrowed to run business and the economic condition go bad.The government may stay in the same level in the short run.So we get the result the world stuck in the crisis,the production decrese ,the income go down and the demand decline.We can show the situation in the equation Y?=C?+I?+G.

    (2)I=I(Y,i) (+)(-)

    We realise that the investment have positive relation with the income while have the nagative with the interest rate.

    The Americans suffer from the crisis,their income

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