Illustrate and explain what is meant by a liquidity trap, and analyse how the 2007/8 financial crisis may have pushed many rich countries into this situation. What factors led to a gradual recovery?
Illustrate and explain what is meant by a liquidity trap, and analyse how the 2007/8 financial crisis may have pushed many rich countries into this situation. What factors led to a gradual recovery?
When the value of financial assets and instruments significantly drops, a financial crisis has occurred. It is a time in the economic cycle when an economy experiences long-term difficulties. A financial crisis is any of a wide range of circumstances where certain financial assets unexpectedly lose a significant portion of their nominal value. Low interest rates and an excess of liquidity in the American financial system were the main causes. This promoted the expansion of subprime mortgage lending to consumers who, in other situations, would not be eligible for loans due to their higher default risk.
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