Financial Crisis of 2008 in the UK - Essay Example

Introduction: It has been encountered that United Kingdom is constantly suffering from increased unemployment are the major reason of this unemployment is the financial crisis of 2008 that are known world financial crisis as well. The major aim of this paper is to describe the overall impact of the financial crisis over the unemployment of United Kingdom and for this purpose three models of macroeconomic have been utilized. The first model that has been utilized in order to demonstrate the impact of the financial crisis over unemployment of the country is Aggregate demand curve. Aggregated demand curve represents the overall quantity of goods that are demanded at different price level. Second model that has been employed is IS-LM Model, and the third model is Keynesian model Aggregate demand model: The concept of aggregate demand is that increase in total demand of products cause to increase the output that lead to the increased demand of labor. If the aggregate demand is lower it will cause to decrease the output and lead to decreased demand of labor (Anderton, 590). As in the case of United Kingdom economy is facing decrease in aggregate demand due to the financial crisis because this crisis made a significant impact over the purchasing power of people. People who have money are saving rather spending their money. This decrease in demand is leading country towards decrease output, therefore, towards unemployment; because firms working in the economy do not require workers to produce output. It has been observed that uncertainty shocks cause to slow down the demands. Therefore, economies have to face higher inflation rates. Such as in United Kingdom, the financial crisis showed huge uncertainty in the financial market that slow down the demand of goods market and result occurred in lower economic growth and increased unemployment rate. For example, the 2008 financial shock reduced the purchasing power of households. By using the right of postponing the purchases, households forced the firms to reduce the manufacturing and in result made delays in new hiring and increased firings of employees that contributed in high unemployment rate. The uncertainty increased the unemployment from the year of 2009 to 2013 in United Kingdom and now the effects are slowing down (Leduc & Liu, 1-30). Increase in the lowering demand of labor is high this time as compared to prior shocks of 1981. This is because this time “ the zero lower bound” restrained the monetary policy on the nominal interest rate. As it has been observed that uncertainty shocks reduced the aggregate demand which mean lower relative prices of goods, this decline lowers the value of new match and organizations contributes in unemployment through lower the job posts. The decline in relative prices has multiplier effects on market and increase the shocks of uncertainty that result in generating the larger macroeconomic fluctuation (Diamond, 881-894; Leduc & Liu, 1-30). IS-LM Model and unemployment: IS-LM model represents the combination of interest rate and income, and it communicates that increase in income increase the demand of the money while the demand of money decrease if the interest rate is high. Economies make changes in their monetary policies when they face any financial crisis. Countries decrease the interest rate that the cause to increase the spending and through a multiplier effect increase in spending lead economy to increased output and then to increased employment (King, 45-103). This phenomenon is clearly visible in the figure presented below: (Economist’s View) In the case of United Kingdom, the financial crisis decreased the spending because companies had to pay higher interest rates therefore; the output decreased that led to increased inflation. Due to the immense negative impact of the financial crisis of 2008, the government of United Kingdom is constantly worried about the employment rate. It has been expected that this rate will grow, and central banks are making constant efforts to cope up with this and other issues. Monetary policies are being changed, for example, to make changes in interest rates. The bank of England responded the crisis of 2008 by lowering the interest rates for short term (Joyce, Tong & Wood, 200-212). Monetary policies are being changed, for example, to make changes in interest rates. The bank of England responded the crisis of 2008 by lowering the interest rates for short term. By doing this banks started to stop profit making by companies and this step gave hit to investors, and the output increased and the effect on employment occur in this year. Investment demands are dependent upon the cost of loans charged by the banks (Blanchard, Amighini, & Giavazzi, 416-430). A decrease in the real interest rate will not make a significant impact on investments for making huge impact government have to make changes and slow the expected real interest rate of future. If the government reduces the future real interest rate then the investment will increase at significant level that will lead to increased output demands and therefore decreased unemployment (Blanchard, Amighini & Giavazzi, 51-59). (Blanchard, Amighini, & Giavazzi, 313) As in the above picture it can be seen that how UK faced sharp reduction in spending with the monetary expansion that leads to lower interest rate in short run (Blanchard, Amighini & Giavazzi, 313) Keynesian model: Keynesian model expresses the impact of total economic spending on inflation and output. According to the concept of Keynesian model, in order to cope up with the depression government increases it is spending and slow down the taxes in order to encourage the demand and get the economy over from the financial crisis (Blanchard and Galí, 35-65). United kingdom increase its spending through providing allowance to people who are unemployed and through increasing the spending government made a step to encourage the investments. United kingdom government has also slowed down the interest rate that express the concept of Keynesian model. Spending of United Kingdom increased up to 88956 GBP million (Trading Economics). Due to the financial crisis the confidence of consumers and investors decreased that resulted in lower economic growth and increased unemployment. The output decreased due to increased uncertainty that led the country to increased unemployment. Conclusion: From the research, it has been concluded that the financial crisis of 2008 or uncertainty acts as a negative aggregate demand because it results in increased unemployment rate. It has been encountered that the financial crisis reduced the confidence of investors and decreased the spending level due to which output demand decreased and for this reason unemployment increased as well. Investors want to earn profit as compare to serve people. Therefore, it is essential to encourage them for making investments and for this reason the interventions of government is essential. It has been encountered that increase in income increase the demand of money and spending power increase due to which the aggregate demand of output increase that lead to decreased unemployment (Cleaver, 99). Government should lower down the taxes and interest rates for a long run. This will boost the confidence of investors, and they will spend more that will cause to increase the aggregate demand of output that will lead to increased employment ultimately. Works Cited Anderton, Charles H. Economics 3rd edition. Pearson Education, 2006. Blanchard, Olivier, and Jordi Galí. "Real wage rigidities and the New Keynesian model." Journal of Money, Credit and Banking 39.s1 (2007): 35-65. Cleaver, Tony. Economics: the basics. Routledge, 2011. Diamond, Peter A. "Aggregate demand management in search equilibrium." The Journal of Political Economy (1982): 881-894. Economist’s View. The Economist: Low Long-Term Rates Caused by Easy Money, Not Higher Saving. 2005. Online. 5 Dec. 2014. http://economistsview.typepad.com/economistsview/2005/08/the_economist_l.html Giavazzi, Francesco, Alessia Amighini, and Olivier J. Blanchard. Macroeconomics: A European Perspective. London: Financial Times Prentice Hall, 2010. Joyce, Michael, Matthew Tong, and Robert Woods. "The United Kingdom’s quantitative easing policy: design, operation and impact." Bank of England Quarterly Bulletin 51.3 (2011): 200-12. King, Robert G. "The new IS-LM model: language, logic, and limits." Economic Quarterly-Federal Reserve Bank of Richmond 86.3 (2000): 45-103. Leduc, Sylvain, and Zheng Liu. "Uncertainty shocks are aggregate demand shocks." Federal Reserve Bank of San Francisco Working Paper 10 (2012). Online. 5 Dec. 2014. http://www.frbsf.org/economic-research/files/wp12-10bk.pdf Trading economics. United Kingdom Government Spending. 2014. Online. 5 Dec. 2014. http://www.tradingeconomics.com/united-kingdom/government-spending Read More