banking_part2 - Why study financial systems and money? Why...

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hy study financial systems and money? Why study financial systems and money? Interrelations with the financial crises a)inflation b) interest rates entral Bank and monetary policy c) Central Bank and monetary policy d)financial crisis 1
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inancial Crisis e Great Depression Financial Crisis – the Great Depression ederal Reserve officials viewed the stock market boom of 1928 and 1929 during which Federal Reserve officials viewed the stock market boom of 1928 and 1929, during which stock prices doubled, as excessive speculation. To curb it, they pursued a tight monetary policy to raise interest rates. The Fed got more than it bargained for when the stock market crashed in October 1929. Although, the 1929 crash had a great impact on the minds of a whole generation, most people forget that by the middle 1930, more than half of the stock market decline had been reversed. What might have been normal recession turned out into something far different, however, with adverse shocks to the agricultural sector, a continuing decline in the stock market after the middle of 1930 until March 1933 in which over one-third of the banks in the United States went out of business. he continuing decline in stock prices after mid 930 (by mid 932 stocks had declined The continuing decline in stock prices after mid-1930 (by mid-1932 stocks had declined to 10% of their value at the 1929 peak) and the increase in uncertainty from the unsettled business conditions created by the economic contraction made adverse selection and moral hazard problems worse in the credit markets. The loss of one-third of the banks reduced the amount of finacial intermediation. This intensified adverse selection and moral hazard problems, thereby decreasing the ability of financial markets channel funds to firms with productive investment opportunities. As our nalysis predicts the amount of outstanding commercial loans fell by half from 1929 to 2 analysis predicts, the amount of outstanding commercial loans fell by half from 1929 to 1933, and investment spending collapsed, declining by 90% from its 1929 level.
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inancial Crisis – e Great Depression Financial Crisis the Great Depression he short- ruiting of the process that kept the economy from recovering The short ciruiting of the process that kept the economy from recovering quickly, which it does in most recessions, occurred because of a fall in the price level by 25% in the 1930-1933 period. This huge decline in prices riggered a debt deflation in which net worth fell because of the increased t igge ed a debt deflation in which net wo th fell because of the inc eased burden of indebtedness borne by firms. The decline in net worth and the resulting increase in adverse selection and moral hazard problems in credit markets led to a prolonged economic contraction in which unemployment rose to 25% of the labor force. The financial crisis in the Great Depression was the worst ever experienced in the United States, and it explains why the economic contraction was also the most severe one ever experienced by the nation.
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banking_part2 - Why study financial systems and money? Why...

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