Market Failure Essay

1068 WordsApr 28, 20115 Pages
1 from the case study can observe four main factors which might be the cause why the recovery in advanced economies is expect to be weak until late 2011.first, high unemployment. Unemployment individual on these countries have a weak incomes, low confidences, low consumption(c) and tight credit conditions. This lead to a decline in their standard of living, and result of reduce in aggregate demand (ad).secondly, public debt. The government increased spending also reducing various forms of taxation in order to boost aggregate demand. These put governments budget into deficit, this deficit led to government borrowing. Government borrowing and spending had effects on crowd out the private sector. At some stage, the governments of advanced economies, would have to repay its debts and would print more money this could lead to increased inflation. Or increased taxes for later on.thridly, banking sector. Now, banks are unwilling to lend because their own financial conditions have deteriorated. This lead to a low in consumption(c) and low on investment (I). Firms now would cut off in labour or investment in other countries to get some profits. These lead to a fall in aggregate demand. Finally, household. There are in high debt and these debts have to be repaid .they increasing their savings in order to repay it and reducing the average propensity to consume.therefore,high interest rates makes borrowing more expensive and hit spend, this affect consumer confidence and reduce willingness to take further debt despite now, interest rates are low. 2 emerging Asia has recovered faster than other regions owing to the highly effective policy response taken by governments: first, financial systems in Asia were less hit by events in developed nations than in other countries as financial systems and financial services play a much smaller role in their economics and reforms made few

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