“Originate to distribute securities” was substituted by securitization which facilitated the increase in ... ... middle of paper ... ...avoiding even deeper collapse of the global GDP and of employment. The government also created the Troubled Asset Relief Program (TARP), for the establishment and administration of the treasury fund, in an effort to control the ongoing crisis. In conclusion, fiscal responses has lead to sustained economic Revival following the crisis just when the vulnerabilities in the financial sector have been addressed without endangering the fiscal sustainability. The crisis resolution actions generally involve costly government reorganization of private sector’s and the financial sector’s balance sheet. This can have a long-term negative effect on the public debt levels.
People who are entrenched in debt, however, should employ a strategy of cutting down variable spending and putting the extra money towards debt payments. Akin to the proposed balanced budget amendment, this ensures that they lose less and make more money. Debt is slowly pushing America’s economy into an unstable state. This will eventually result in a dramatic increase of taxes, which will subsequently decrease the overall budget of most Americans. National debt is increased even more when people abuse credit, accepting debt into their lives.
Inflation can lead to unemployment, as people demand less due to higher prices and therefore demand for labor maybe decreased. Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate.
Typically, when the economy is in the slumps you can expect the deficit as well as government spending to rise due to the demands on safety-net provisions and falling tax revenues. Fiscal policy is used for managing the economy; it also affects the total Gross Domestic Product or GDP. Expansionary fiscal policies should raise the demand for goods and services, leading to an increase in output and prices. So when the economy is in a recession, unused production ability and unemployed workers increase, this demand will lead to more output without increasing prices. During a recession, automatic stabilizers kick in, like unemployment insurance and changes in tax
The additional income allows people to spend more causing more demand. Businesses may respond to this rising demand by raising prices because they know they cannot produce enough. In order to stop inflation, the central bank uses a restrictive monetary policy. This is where interest rates are raised and the bank sells its holdings of treasures and other bonds. The reduction in the money supply restricts liquidity and slows down economic growth.
This relation can be justified by suggesting that risky firms will tend to use more debt since they cannot transfer wealth from bondholders to shareholders (Bennet and Donelly, 1993) or that firms with risky investments will use higher levels of debt (Huang and Song, 2003). Additionally, a firm can increase its levels of risky investment if the costs and risk of entering into a liquidation process is low (Deemosak et al., 2004). As the Latin American firms volatility of earnings increases, they tend to rely in debt for their future investments. Focusing to the models including macroeconomic indicators (columns market as II) it can be seen that inflation has a strong and significant positive relation with leverage. The results, though, contradict with literature [Booth et al.
Bankruptcy Cost: The debt brings with it future cash flow commitment in the form principle borrowed and periodic interest which increases the potential risk of firms default and bankruptcy. (Ebaid, 2009). Modgliani and Miller in their analysis had proved that firm can lower their cost of capital by increment of leverage in their capital structure. However considerable use of debt financing would expose business to high probabilities of default (Khan and Jain, 2005).Not only this, the firms will also find it demanding to meet the promised principles and interest. Furthermore, the firm is likely to incur costs and suffer penalties if it is not able to pay the interest and principles on time.
As the interest rates falls the consumer and investor can borrow money more easily and cheaply. The expansionary monetary policy is one of the traditional policies used by central banks during the period of recessions. The expansionary monetary policy tends to cut the interest rates and boosting the supply of money in the economy. So as result it helps in increase of AD. The central bank creates money which it uses to buy government bonds from commercial banks.
Hyman Minsky’s economic model of a general financial crisis combines a cash-flow approach to investment with a theory of financial instability. People invest with the expectation that it will yield a stream of cash flow and that it will be sufficient to cover contractual debt obligations when it is due. Minsky stated that the changes in supply of credit were pro-cyclical. The supply of credit increased during an economic boom when there was a surplus of cash flow after debt obligations were met, whereas, the supply of credit decreased during economic slowdowns. When the economy is booming there is an increase in credit and a speculative euphoria develops.
To Reduce unemployment 4. To avoid large deficit on current account balance of payments Fiscal Policy The Fiscal Policy may be Expansionary or Deflationary. Currently the policy is expansionary. This involves increasing AD, therefore the government will increase spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income.