Class notes
Lecture notes Unit 4 - Making markets work
- Course
- Institution
These notes helped me get an A* in A Level Economics, covering all aspects of the specification, plus hints of real world context.
[Show more]
Seller
Follow
henryquinn
Content preview
4.5.4 The global financial crisis Decline of worlds GDP
Before asset prices were high
Boom in economic demand
Risky bank loans and mortgages
Backed by subprime mortgages
Borrowers with poor credit histories allowed mortgages
Housing prices crashed and people defaulted on their mortgages
Banks had insufficient funds
After the UK used expansionary fiscal policy
VAT cut from 17.5% to 15%
Government received less tax revenue die to recession
Increased government borrowing
Global recession started spreading and interest rates cut further
No confidence in economy so did not spend
Interest rates cut to 0.5% in March 2009
Initially £75bn was injected now £375bn
UK had low inflation
Contributing Factors
Subprime mortgages
o Risky bank loans and mortgages
o Government securities backed by subprime mortgages
o Means that borrowers had poor credit histories
o Asymmetric information as banks did not know how risky the loans were
o Banks make sure you can afford to pay back your loan
Moral hazard
o There is a risk that the borrower does the things that the lender would not deem
desirable
o Makes the borrower less likely to repay the loan
o Usually occurs when there is some form of insurance for the mistake
o Banks may take risks if they know the BoE will bail them out
o Systematic risk can be seen as a negative externality.
Speculation & market bubbles
o Occurs when a price of an asset is predicated to rise significantly
o Causes it to be traded more, demand exceeds supply
o Price rises beyond intrinsic value
o The bubble burst when the price steeply falls to original level
o Causes panic and investors try to sell their assets
o Loss of confidence leads to economic decline or a depression
Role of banking regulation
o Government might regulate banks with regulation & guidelines
o Ensure their behaviour is clear
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller henryquinn. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $10.32. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
75619 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now