Final Analytical Application of Current Microeconomic events Introduction The article ‘Financial crisis in the living room’ written by Reran Boarders on the 8th of September 2013 featured in the Chalked Times. It questions the ramifications ascribed to the fact that the populace’s salaries are not increasing in congruence with housing costs. The article cites that the recovery of the residential estate in Dub has featured in the news for quite some time and the prices of houses have soared, and have been accompanied by high rental costs for properties.
As a result of he drastic increase in the housing prices which is bound to extend until the year ends, utility costs have flared up in the region. The credit crisis ascribed to the region has resulted in an increase in the cost of purchasing household equipment, as well as conducting routine household maintenance by approximately 3. 69 percent (Boarders, n. D). The emergent question is what impact this surge is bound to have on consumer lending, debt repayment and borrowing.
During the beginning of the year, over a five-month period, consumers took loans worth more than Duh billion, a um that correlates with the whole of sass’s increase. Moreover, the I-JAKE presently represents more than 60% of the consumer debt within the ICC. Its ratio of debt to income is greater than that of the US and most countries in Europe. This is an unsettling sign that indicates mounting household debt within the country. In addition, most residents are experiencing trouble making loan or mortgage payments; they are making use of credit cards to make these payments.
Making use of debt for purposes of debt repayment is a slow but sure burden that cripples individual finances since the annual interest rates pegged on credit cards are about seven times higher than the interest rates pegged on personal loans Boarders, n. D). In addition, personal loans are insecure, meaning that whatever individuals purchase with it cannot be utilized as collateral for purposes of recovering the debt’s costs, in contrast to a car loan or mortgage. Since the lender is only reliant on the borrower’s promise to repay the loan, there is a great risk, and consequently a higher interest rate Boarders, n. D).
As established by the economic domain, microeconomics souses on consumer decisions and procedures employed to address conditions principal to bad customer decisions by the government. The economy has suffered a serious setback form the current global recession with the government taking on a nominal part in trying to address these issues. The most notable recent microeconomic event is the global credit crisis that has wrecked the current economy. Although there are other economy-crushing issues facing the current economy, the credit crisis seems to be a more eminent threat as we approach the third quarter of the year.
This paper explores the credit crisis ascribed to the emirates. The paper explains the underlying economics of this event and describes the main challenges involved, and in conclusion, proposes the appropriate role of government policy in relation to the event. Credit Crisis Contributions from micro-economists support the existence of market failures that influence the regulation of markets. In the current economy, the market failure that has generated a chain of other economic crises finds its roots in the swift Economic Problem Analysis By Crystallization o comprehend, and properly weight threats related to credit (Beck, 2008).
This, in turn, leads to deliverable in the banking system, causing a crash in the entire system. Raising interest rates make cash more valuable, the system essentially leans towards necessitating and promoting lower rates. However, the instituted leverage eventually becomes farcical. The surplus credit compels an upward movement on the prices of asset until the risks of acquiring these assets are not Justifiable from their earnings (Perlman’s, 2012). Len the current economy, banks continue to misjudge the likelihood of decline in the cost of housing, and trust that they can quantify the interconnection of the credit menace.
Together with consumers, banks fail to account for any low- probability events, which may turn out to be adequately necessary. Subsequently, this leads to a wave of failures, hence, impairing the economy (Perlman’s, 2012). Underlying Economics To understand the underlying economics of the current credit crisis, one must consider the economic theories aimed at explaining economic problems in relation to products and resources. Microeconomic theories mainly focus on the premise of apply and demand, aggregating the quantity demanded to the quantity supplied at every achievable price per unit.
As compared to other microeconomic theories, the classical school theory best explains the underlying economics of the impending credit crisis. The ideas proposed in this school of thought support the concept that an individual inadvertently facilitates the best possible outcome for all by looking out for oneself. The theory identifies land, labor, and capital as the major contributors to a nation’s wealth and proposes that the ideal economy is an autonomous market yester, which automatically assures economic needs of the public.
In this case, institutions that procured, invested and securities the supreme and mortgage debt, aimed at meeting the housing needs of the citizens (Beck, 2008). The classical theory also suggests that population growth and capital, imperative to a preset supply of land, increases rent while reducing profits and wages. Upon closer examination of the credit crisis, we see how mortgage dealers offered mortgages to many people that they later could not afford when the rising home prices impeded. However, it is racial to note that the dealers only do so as the financial institutions willfully purchase these mortgages.
The result of this is unceasingly low resources, which prevent the living standards of most citizens from mounting above the subsistence level (Beck, 2008). Challenges One of the significant challenges involved with the credit crisis relates to contractions in the economy and mass unemployment of the public. This is due to the increasing bankruptcies, which in turn eliminates the surfeits of the entire banking system through a colossal depression (Carson, 2010). Another probable challenge associated tit the credit crisis is the modernization and retirement of public assets, such as mortgages, and corporate debt.
Though this may be an expedient way to curtail the credit crisis, banks may experience a loss of faith from their investors, which will in turn have dramatic consequences on the entire economy (Rogers, 2012). Proposed Government Policy As bank bailouts continue to build up, governments continue to seek new policies to combat the credit crisis. One policy proposed by members of government as a imitation of the legislations of the regional central bank, this policy will assist the overspent engender their own credit.
The 2013 state budgets exhibit the biggest deficits on record with those of 2014 expected to be worse. The increasing unemployment rates will keep state income tax receipts at low levels, and increase demand for essential services states provide. Therefore, developing a state-owned bank will facilitate the use of tax revenues and pension contributions as fiscal foundations for the expansion credit where as required. Any existing alternatives will construct a deeper downturn. References Boarders, R. B. (n. D. ). Financial crisis in the living room.