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The Stock Market Crash

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The Crisis


  • The GFC was caused by the fall is U.S. house prices from 2007, which had doubled since 2000


  • It exposed serious housing finance weaknesses in the US, creating a crisis for the major banks


  • The stock markets fell everywhere as a result of the financial crisis, majority of the world relied on the stocks on the US citizens


  •  Introduced monetary policy through interest rates and quantitative easing


  • Governments spent and borrowed a lot as a result of the crisis



Expansionary Monetary Policy - Governments try to expand spending by reducing interest rates, increase demand, unemployment goes down.


Restrictive Monetary Policy - Interest rates go up, spending goes down, people save more in order for the government to avoid inflation.



(Nominal interest rate - inflation rate = real interest rate)



How did Australia avert the worst effects of the crisis of 2008?


  • The Mining Boom: Australia had an abundant t amount of gold and coal
  • The Fiscal Policy: Substantial policy enacted by both the Rudd and Gillard government
  • The monetary policy: cash rate was cut from 7% to 3% in 6 months in order to boost the level of spending and cash flow


The United States


  • Output growth was strong until 2007 due to
  • Aggressive monetary policy (Feds kept the interest rate very low - down to 1%)
  • Aggressive fiscal policy - big "temporary" tax cuts by Bush
  • Weakening US dollar exchange rate boosting exports


  • Crisis on the Wall Street spread to all financial capitals in the world, and then to the 'Main Street'
  • US growth was negative in 2008-2009 due to the financial crisis
  • Unemployment doubled
  • Inflation turned tod deflation in 2009


The Great Recession


  • Weakness in the architecture and regulation of housing finance in the U.S. led to bankruptcy of major investment banks
  • Interest rates lowered to almost 0
  • Fed introduced  innovative ways to create more liquidity to encourage banks to restore normal lending
  • Large fiscal stimulus plans
  • Improved financial regulation


The European Union


  • France, Italy, Germany and Spain generate 60% of total output of the EU
  • Unemployment rate = 6.6%
  • Growth = 0.2%





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