The paper 'Global Financial Crisis of 2008' is a wonderful example of a Macro and Microeconomics Case Study. In 2008, a major financial crisis hit the United States and this led to a recession. A recession can be defined as a decline in business activities that lower the GDP of a country or state. Kevin and Kalivinder (4) define a recession as a period associated with reduced activity and economic hardship for a substantial number of people. They term this as a period where jobs reduce and employees actually lose their jobs leading to a rise in the employment level. Though the recession started in the United States, it finally spread to other parts of the world including Europe.
This affected the global economic crisis and led to the economic challenges being faced today. Causes of the crisis The major cause of the recession was the fact that banks were able to create large sums of money by lending individuals especially those in the real estate business. The prices of houses increased due to the accessibility of funds from the banks (Friedman, 198). When the interest rates accumulated people and organizations were unable to pay back the loans and the banks feared going bankrupt.
They, therefore, reduced their lending leading to a fall in the prices in the market. Due to fear of further losses by people who had borrowed money at higher rates, they sold their property to repay their loans. This led to a fall in the price of the house. Another cause of the recession was the fall of Lehman Brothers in September 2008. Lehman Brothers Holdings was a prominent security firm in the US and its fall caused great fear in the financial markets.
(Warwick & Andrew, 5) Banks literally stopped loaning each other and as much as the authorities tried to rescue the economy by injecting money into the financial markets but the damage was done already. Effects of the global financial crisis Increase in unemployment Due to the decrease in demand, many companies were not operational and so most of them closed down. This close-down rendered many employees jobless leading to an increase in the unemployment level. These people initially worked in these firms when the recession occurred.
In another case, unemployment may arise when the firms fail to employ people because they are trying to reduce their cooperation costs (Christopher & Steven, 2). To do this, they will deduct salaries of their current employees, fire the current employees, and hire others at lower wages or lastly fail to employ more people. The unemployed individuals were denied an opportunity to train themselves and to gain more skills which would afterward help them secure jobs at organizations after the recession. Fall in tax revenue During the 2008 global financial crisis, many firms were making losses meaning that the government received little or no corporation tax from these firms.
A rise in unemployment also lowered the unemployed did not pay taxes and the ones who were employed received little wages and so they paid low-income tax. Since the wages were hardly enough, people had to reduce their expenditure and this only meant that the VAT tax also reduced. During a recession, people tend to pay less tax (Black, Trudi and Barry 20)
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Kevin L. and Kalivinder S. Decision-Making in Hard Times: What is a Recession, Why Do
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Slemrod, Joel, and Jon M. Bakija. Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes. Cambridge, Mass: MIT Press, 2004. Print.
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