Explain how the global financial crisis of 2007-2009 was the ...

[dakota nelson]

Explain how the global financial crisis of 2007-2009 was the result of macroeconomic imbalances.
 
  What will be an ideal response?

Question 2

Internal economies of scale means that
 
  A) firms are experiencing lower average production costs due to a geographical concentration of firms in their industry that make it cheaper and easier to hire highly specialized workers and inputs.
  B) firms will have lower profits after international trade begins, because costs will be higher than when they just focused on the domestic market.
  C) consumers will have less choices once trade begins, because firms will be squeezed out of the market.
  D) expanding the size of the market the firm serves reduces overall per unit costs, since the firm can spread costs over more output.

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Answer to Question 1

Beginning with the rise of house prices in the United States, the United Kingdom, Spain, and several other countries, private investors had significant incentives to invest in real estate, driving prices to unsustainable levels. Investment was facilitated by global imbalances in which countries with high savings rates and large current account surpluses, such as China, Germany, and oil exporters, lent to the United States, the United Kingdom, Spain, and other countries with large current account deficits and significant investment opportunities. The result was an unsustainable increase in house prices and a housing bubble in many cities. When house prices began to fall, it put pressure on financial systems in countries where large financial institutions were using the home-loans they made as collateral to borrow heavily in short-term credit markets. The failure of U.S. investment bank Lehman Brothers occurred when it was no longer able to obtain short-term credit after its lenders rejected its collateral, triggering the most intense period of the financial crisis. The first phase of the 2007-2009 crisis involved macroeconomic imbalances in current accounts, and savings and investment. These imbalances were the result of private sector decisions regarding spending, saving, and investment. The second phase began as tax revenues declined and social spending automatically increased as countries fell deeper into recession and government budgets came under pressure. The fall in tax collections and the rise in social spending due to recession constitute an automatic stabilizer since the changes are stimulatory and partially counteract the recession. Inevitably, however, they create or worsen budget deficits, and in some cases the deficit becomes unsustainable.

Answer to Question 2

D