The 2008 global financial crisis cause a panic on the consensus on how to run macroeconomic policy. Reminding the world of the risks the financial sector imbalances are associated with. Showing the boundaries of monetary policy can cast uncertainty on some of the views of its intellectual foundations. The basic reason for financial crises is that they originate due to an excess that is frequently monetary excesses. This leads to a boom and an unavoidable bust. The 2008 crisis was not different, a boom accompanied by a collapse led to defaults. The downfall of loans and mortgage-related securities at financial institutions resulted to a financial disorder. The Lehman crisis first showed how much policy makers had misapprehended the dangers posed by the financial system and showed the limits of monetary policy. The euro area which affected and it needed to rethink the working of currency mergers and fiscal policy, by improvising with the use of alternative monetary policies to the original fiscal incentive.
Monetary policy protects the government changes in either the supply of money or interest rates. These policies are usually implemented by the central bank of the country or area. The focus of monetary policy and the roles it plays in the financial system and its inferences for macroeconomic developments, policy during the crisis have led to new queries on old matter, how inflation and output relates, with direct effects to monetary policy. The foundation to the interference of credit flows was as a result of asset price bubble of the housing price boom. It asset boom was referred to as a mania. The saying however, is confusing, why regular people become keen buyers of anything has become the aim of desire. An asset boom is circulated by an extensive monetary policy that lowers interest rates and encourages borrowing beyond sensible bounds to obtain the asset. The federal government accommodated the crisis from 2001 and was too slow to tighten the monetary policy, delayed controlling till June 2004 and then ending the monthly 25 base point increase in august 2006. Interest rate cuts began on august 10 2007, and worsened in an extraordinary 75 basis point decrease in January 2008. It publicized an unprepared video talk conference a week before a planned federal open market committee assembly. There was little increase in the interest rates in 2004 so it ended soon than expected (Schwartz, 2009).
In the situation of housing boom, the government played a role in motivating demand for houses by persuading the benefits of home possession for the well-being of people and families. Freddie Mac and Fannie Mae were established as government-funded enterprises. Congress pushed Fannie Mae and Freddie Mac at the beginning of 1992 to increase their mortgage purchases to low income borrowers. Plain targets were being given to the enterprises by the department of urban and housing development. In 1996, 42 percent of its mortgage financing went to mortgagors who were below the median income in their region. In 2008 the aim was to attain a 28 percent, and during 2000-2005 the enterprises were able to achieve that. Freddie and Fannie bought billions of dollar worth of securities for their own collections to make money and help satisfy the housing and urban development affordable housing goals. The enterprise was an important contribution to the demand for subprime securities. Regrettably, the approach remains at the core of the political process, and of proposed solutions to the crisis (Roberts 2008). One of the ways in dealing with the monetary policy problem would be, expanding the policy through advertising the housing price boom. Alan Greenspan (2008) argued that if the central bank had terminated the asset price boom, it would have immersed the economy in a recession which the public in a democracy wouldn’t stand for. He didn’t explain why the Federal Government could not have lead a less extensive monetary policy that did not reduce interest rates to a level that allowed mortgage borrowing and lending seemed less risky and caused house price increases.
Price boom in housing could have been prevented if monetary policy had more restriction(coin 2001). Fiscal involves changes in taxation and government spending. A government can intentionally change tax rates and level of government spending to influence economic activity. When monetary policy faces liquidity trap, the government usually turns to fiscal stimulus to sustain demand to avoid what could become a great depression. But, when the risk appears to be moderate, they still find themselves left with a high public debt. At the beginning of the crisis, the median GDP ratio in united states economic was close to 42 percent and was still increasing in 1996 and its target increased to 50 percent in 2000 and 52 percent in 2005, due to political class greed which pushed home-ownership rates to a higher rate. This was during the Bill Clinton and George W. Bush’s reign, assisted by the congress, announcing that rise as it occurred. And the result was that it put the entire financial system as risk; the concealed costs were hundreds of billions of dollars channeled into the housing market instead of more productive assets. If fiscal deliberation, through great revenue or lower spending was not possible, low or negative real interest rates could in principle help to maintain debt sustainability. It is vital that monetary policy decision continue to be under the sole view of the central bank, without political interference. Likewise, the central bank should base its decision on the way the debt situation and fiscal adjustments would impact inflation, output and financial stability. The awareness by the public that the government’s involvement plan had not been well thought through, and the official story that the economy was tanking, might have led to the panic seen during the crisis period. To avoid misguided actions in future, it is necessary that we go back to thorough principles of monetary policy, centering government interventions on clearly stated diagnoses and predicted agendas for government actions.
Demand concept explains the quantities of goods that buyers are ready to buy at various prices at different period of time, other things being equal. Whereas the supply describes the amount of goods suppliers are willing to sell at different prices and at different period of time other things being equal. The equilibrium point will be achieved when the output level and price level of both the aggregate demand and supply meet. If price level of a product is below the center point, the excess demand would push the price level back to the equilibrium level. Also if the price is beyond the center point, the excess goods and services will not be sold. Leaving the sellers no choose but to cut their prices. In the short run, a rise in aggregate demand resulting to an increase in government spending will probably increase production and raise the price level. Long run aggregate supply is the output which organizations would produce after the price level and factor prices have fully adjusted after any shift in aggregate demands. And it has a perfectly elastic curve. GDP know as Gross Domestic Product is a broadly used measure of a nation’s income. If refers to the home economy and products means output. GDP can be measured using the output, income and expenditure methods. They usually give the same total because they all measure the flow of income produced in an economy.
Unemployment occurs when people are able to work but they cannot find job. And it can bring with it serious problems both for those who are unemployed and for the country. The government measures unemployment with two methods, the first measuring the number of people in receipt of unemployment-related benefits also called the claimant count. It is really and cheap to calculate. The second involves a labor force survey using the international labor organization definition of unemployment. Inflation is situation in the economy where there is a general increase in price of goods. In this case there is so much circulation of money in the economy. The consumer price index is a widely the best measure of inflation, it helps to measure inflation as experience by consumers in their daily expenses. Economic growth occurs when an economy achieves an increase in its national income, measured by Gross National Product (GNP), in excess of its rate of population growth.
Economic development shows how well a country is developing, indicators of comparative development, its economic structure, population growth and population structure and classification according to levels of indebtedness. All the factors can tell how well developed an economy is. Business cycle is the regular swings in economy activity that occur in most economies varying from boom conditions to recession, when total economic outputs declines. Several factors can influence a business cycle, overheating boom with the help of inflation can lead the economy into a recession, finally achieving slump. But policies, deflationary strategies can bring the economy back to growth transcending to the overheating boom. The multiplier effect shows a tendency for a change in aggregate expenditure to result in a greater rise in GDP. This effect occurs because a rise in expenditure will create incomes, some of which will income, some of which will, in turn, be spent and thereby create more income. For instance, if people spend 80percent of any extra income, an increase of government spending of $200 million will cause a final rise in GDP of $1,00m. This is because the initial $20million spent will create higher income. Macroeconomics has great impact in politics, society and people. It helps institutions, government to better understand the working economy. Economic problems are related to behavior of total income, output, employment and the general price level in the economy. Another great impact are its variables are statistically measurable they facilitating the possibilities of analyzing the effects on the functioning of the economy. It gives a bid eye view of the economic world.
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