In the year 2008, the global financial crisis broke in UK, the interest rate were at 5%.
In the year 2009,
the UK unemployment rate is high, so the consumer and business are worry about
the bank holding their funds. Therefore, the bank cut down the interest rate in
order to recover the economy during the economy recession.
The government want
to boost the economy so it use the bond exchange to money and subsidize the
money to bank, insurance and pension fund. So, the bank, insurance and pension
fund will lower the interest rate and the business and consumer will take the
money to do investment and more money is spent due to the reducing in the cost
of borrowing. Thus, let the money flow in the basic circular flow of income in
order to boost the economy.
Diagram 1
As the shown on diagram 1, the interest rate have decreased.
Thus, the aggregate demand curve shift to the left from AD to AD2 and the
equilibrium price has decreased. In conclusion, the price level decrease from
Pe to P2 and the quantity demanded of good and services decreases from Ye to Y2.
Hence, the recession is created which mean a period where output decreases,
unemployment increases and firm suffering losses.
List of reference:
why aggregate demand shift to the left ?
ReplyDeleteinterest rate increases.
DeleteWhy is the aggregate demand curve sloping down? :P
ReplyDeletehow to recover economy recession?
ReplyDeletewhen the interest rate decrease in order to reducing the cost of borrowing, and the business man will do more investment and the money will flow in the circular flow to recover the economy recession.
Deletewhy people invest more when the interest rate is low?? o.O
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