Darling warns that the economic times faced by Britain and the rest of the world 'are arguably the worst they've been in 60 years'. Darling is true when he made his claim that Britain and the rest of the world are facing the worst of economic times in 60 years. Bernanke (1983) suggests this has been predisposed by credit crunch that is sweeping across the globe that has decreased loan lending by financial institutions. Schwert (1999) indicates that credit crunch has led into unsustainable high interest rates and stimulated lower investment.
Bloom et al. (2007) argues that credit crash has led into unsustainable stock market volatility. Bernanke (1983) shows that companies have reacted to credit crunch by withdrawing from making investments. This, according to Bernanke (1983) is a catalyst to decreased economic activity. Bloom et al. (2007) indicates that companies have withheld investment waiting for economy to recover. Bernanke (1983) argues that creative destruction has prevailed across the globe and productive companies are likely to grow at the expense of the unproductive firms. Bloom et al. (2007) suggest in countries where credit crunch began earlier, productive companies and unproductive companies’ have totally withdrawn from making investment and this has frozen interference of creative destruction principle.
Bernanke (1983) proposes that such a scenario has lead into zero productive growth for productive companies while unproductive companies have failed to shrink their market share. According to Schwert (1999) credit crunch has led into decrease in sales of secondary consumer wants like cars, fridges and television sets. Financial reporting of many manufacturing companies indicates increase in debts and this has triggered many companies to lay off many of their work force in order to remain in business.
In this restructuring process, many companies are decreasing their wages and salaries. This implies, credit crunch has catalyzed increase in unemployment rates and stimulated an environment for inflation to sweep across developing countries. In one way, increase in fuel costs has increased costs of production that has in turn decreased net profits that manufacturing companies posted in the first quarter, second and the third quarter of 2008 financial year. The effects of credit crunch have witnessed increase in standards of living at the expense of increase in unemployment rates.
The costs of food stuff have increased while the value of housing units has decreased. There is therefore a high likelihood of decrease in national income due to decrease in taxes and government revenue and increase in government spending. 2a Using one diagram, show the relationship between national income and the different components of aggregate demand in a closed economy with a government sector2b Carefully explain how a housing market crash which reduces people's wealth could affect aggregate demand and national incomeBranson, William and Litvack (1976) argue that a housing market crash has an effect of reducing people’s wealth.
Branson, William and Litvack (1976) points out that crash in housing markets affects aggregate demand and national income hence negatively affects the economy. Crouch (1972) indicates that a decrease in household prices has an effect of decreasing household wealth and negatively affects equity. Laidler (1969) affirms that fast decrease in house prices have an effect of reducing consumer spending.