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Financial Crisis

{draw:rect} {draw:rect} GUIDED BY: PROF. PANKAJ UPADHYAYA TABLE OF CONTENT BUSINESS CYCLE DEPRESSION OF 1930s DEBT DEFLATION U.S. FEDERAL RESERVE AND MONEY SUPPLY KEYNESIAN MODEL CAUSES OF THE FINANCIAL CRISIS CAUSES OF FINANCIAL CRISIS 2008 CONCLUSION Business cycle These fluctuations are often measured using the real gross domestic product. Despite being termed cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern. The explanation of fluctuations in the aggregate level of economic activity is one of the primary concerns of macroeconomics. The most commonly used framework for explaining such fluctuations is derived from Keynesian economics. In the Keynesian view, business cycles reflect the possibility that the economy may reach short-run equilibrium at levels below, or above full employment. If the economy is operating with less than full employment, i.e., with high unemployment above the NAIRU, then in theory monetary policy and fiscal policy can have a positive role to play rather than simply creating booms that necessarily collapse on themselves. Another explanation linked to the Keynesian thought is that of Goodwin, who accounts for cycles in output by the distribution of income between benefits and wages. The fluctuations in wages are the same as in the level of employment, for when the economy is at full-employment, workers are able to demand rises in wages, whereas in unemployment periods, they cannot. According to Goodwin, when unemployment and the part of benefits rise, the output rises. {draw:frame} Keynesian economist Minski has proposed an explanation of cycles founded on fluctuations in interest rates: in an expansion period, interest rates are low and companies can easily borrow money from banks to invest. They do not hesitate to borrow money, and banks are not reluctant to grant them loans, because they know they would be...