Answered: When financial crisis hit the nation,…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 12P

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When financial crisis hit the nation, how it can impact on the financial market and what is the short and long term implications to society?

Expert Solution

Step 1

A financial crisis is the market situation in which the value of the price of assets see a steep decline, a problem of liquidity shortage faced by financial institutions, consumers and businesses face a shortfall and are unable to pay debts. The financial crisis also affects speculation activities, the crash of the stock market, and the currency crisis in the economy.

Step 2

Financial crisis adversely impact the financial market-

Fall in financial flow and banks are not able to create credit.
the collapse of various financial institutions.
Stock market crash because of lack of money.
In this situation, investors withdraw themselves from financial institutions by selling assets and withdrawing money from their savings accounts.
The economy faces contraction.
Countries' monetary and fiscal policies face failure in solving financial problems.

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