The Stock Market Crash

The Crisis

• The GFC was caused by the fall is U.S. house prices from 2007, which had doubled since 2000

• It exposed serious housing finance weaknesses in the US, creating a crisis for the major banks

• The stock markets fell everywhere as a result of the financial crisis, majority of the world relied on the stocks on the US citizens

•  Introduced monetary policy through interest rates and quantitative easing

• Governments spent and borrowed a lot as a result of the crisis

Expansionary Monetary Policy - Governments try to expand spending by reducing interest rates, increase demand, unemployment goes down.

Restrictive Monetary Policy - Interest rates go up, spending goes down, people save more in order for the government to avoid inflation.

(Nominal interest rate - inflation rate = real interest rate)

How did Australia avert the worst effects of the crisis of 2008?

• The Mining Boom: Australia had an abundant t amount of gold and coal
• The Fiscal Policy: Substantial policy enacted by both the Rudd and Gillard government
• The monetary policy: cash rate was cut from 7% to 3% in 6 months in order to boost the level of spending and cash flow

The United States

• Output growth was strong until 2007 due to

• Aggressive monetary policy (Feds kept the interest rate very low - down to 1%)
• Aggressive fiscal policy - big "temporary" tax cuts by Bush
• Weakening US dollar exchange rate boosting exports

• Crisis on the Wall Street spread to all financial capitals in the world, and then to the 'Main Street'
• US growth was negative in 2008-2009 due to the financial crisis
• Unemployment doubled
• Inflation turned tod deflation in 2009

The Great Recession

• Weakness in the architecture and regulation of housing finance in the U.S. led to bankruptcy of major investment banks
• Interest rates lowered to almost 0
• Fed introduced  innovative ways to create more liquidity to encourage banks to restore normal lending
• Large fiscal stimulus plans
• Improved financial regulation

The European Union

• France, Italy, Germany and Spain generate 60% of total output of the EU
• Unemployment rate = 6.6%
• Growth = 0.2%

ISSUES IN EUROPE: