UK economy during 2008 recession Essay Example | Topics and Well Written Essays - 1000 words

UK economy during 2008 recession - Essay ExampleIt is worth mentioning that decline in consumption has calculate adverse impacts upon production, which then leads to closure of businesses followed by retrenchment and unemployment. Also, the subprime mortgage property crises in USA foundinged closures, mergers and acquisitions of US financial institutions, but it also negatively affected UK investment, commercial banks and financial institutions as they were among the businesses that also make huge investments in US banking and property sectors. Finally, this led to a credit crunch like stake that sabotaged the financial position of UK banks, which were facing liquidity problems and were reluctant in sanctioning loans to borrowers. Finally, the expectations and forecasts that UK economy would contract by more than 2 2.5% in 2009 also aggravated the situation and interest straddles were reduced to 3% from 4.5% by Federal Bank after instructions of UK politics regarding formulatio n of new monetary polity to reduce business costs, to boost investors and consumers morale and to trigger greater purchase responses. Recall that economic speculation argues that the greater the number of transactions and consumption level, the more employment and jobs opportunities will create due to ninefold exchanges of bills among people (Hetzel, 2009). As far as the fiscal indemnity is concerned, it should be pointed out that UK government announced financial bailout packages of ?12bn and ?18bn so that it could pump money in the economy to eradicate liquidity crises and trigger consumer purchase responses. In addition, the government also announced tax cuts (direct and indirect levies) so that businesses could ensure their choice in challenging external business environment. Had the above measures not been taken, the UK cumulative negative GDP egression rate had surpassed 3% due to credit crunch and rising debts (Wren-Lewis, 2010). 2. Explain UK monetary and fiscal polic y during the crisis according to IS - LM model. It is worthwhile to mention the fact that IS LM model shows the relationship between authentic interest rate and output level. The IS curve shows the corresponding interest rate that clears the good foodstuff. The IS curve slopes down because the aggregate output increases at low real interest rates and vice versa. Indeed, IS curve is derived from changes in desired investment and desired saving in an economy. The LM curve shows the real interest rate that clears the summation market. For instance, the LM curve is actually derived from changes in real money supply and real money demand. In addition, economic theory talks about Full Employment Line that shows the labour market equilibrium i-e employment and output are at Full employment level. As far as the UK economy is concerned, I would assume that the IS LM had been in general equilibrium prior to recession i-e the goods, asset and labour market were in equilibrium simultaneous ly. Real interest IS LM Equilibrium point proceeds Now when UK economy entered in recession, the UK government changed the monetary and fiscal policies that would cause teddy bears in IS and LM curves. For example, the drop-off in nominal interest rate on money will reduce money demand, thereby reducing the real interest rate that clears asset market and causing a downward shift in LM curve. Similarly, increasing nominal money supply in market through remark package will reduce real interest rat