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The Financial Crisis

The Financial Crisis. Where did the crisis start?. From Reality To Theory (1). Financial Crisis and your Macroeconomics knowledge: PIL; Unemployment; Inflation; Interest Rates; Investment; Supply and Demand of Money; Keynesian Multiplier; IS and LM; Fiscal and Monetary Policy;

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The Financial Crisis

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  1. The Financial Crisis

  2. Where did the crisis start?

  3. From Reality To Theory (1) • Financial Crisis and your Macroeconomics knowledge: • PIL; • Unemployment; • Inflation; • Interest Rates; • Investment; • Supply and Demand of Money; • Keynesian Multiplier; • IS and LM; • Fiscal and Monetary Policy; • International Trade.

  4. The Financial Crisis

  5. The consequences for the private sector

  6. Global GDP Contraction

  7. From Reality to Theory… • Which link to your course in macroeconomics? PIL = C+ I + G + X

  8. The impact on the macroeconomics indicators (1).

  9. The impact on the macroeconomics indicators (2).

  10. The Collapse in World Trade.

  11. The Causes of the Financial Crisis • Deregulation in the Financial Sector: • Debt/Capital ratio: from 1:15 to 1:40; • Decrease the weight of mortgages in the capital formation of banks; • Off-balance sheet activity (Basel II)  securitisation in the IB! • “American Dream”: zero equity mortgages

  12. Macroeconomic Policies? • Fiscal Policy; • Monetary Policy; • Trade Policy; • International Coordination.

  13. Macroeconomic Policies • Fiscal Policy measures: • Stabilize the financial sector; • Support demand and improve confidence; • BUT risk of increasing public deficit! • Keynesian Multiplier = 1 • but it may decrease; • Inversely correlated to openness! • Monetary Policy: • Accommodative policy (decrease i –not in developing countries!); • Cross-Border Coordination/Consistency in the financial sector policies to avoid distortions. • Avoid Protectionism (WHY?)

  14. References • OECD (2009): “The OECD Economic Outlook Interim Report” . • IMF (2009): ”Global Economic Policies and Prospects”, G20, London 13-14 March 2009.

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