Bankruptcy and unemployment on the other hand rises (Office for National Statistics, 2010).
The general belief in the cause of inflation is that recession comes after there is an extensive drop in spending. In combating the problem of inflation, governments usually adopts expansionary macroeconomic policies. These involve increasing the amount of money in circulation, decreasing taxation and increasing government spending.
In looking at the case of the UK Economy, it is a good example of the whole process of the period before recession and the macroeconomic conditions prevailing then, the start of recession and the conditions then, the whole recession period and the effect of the government actions on macroeconomic parameters and finally how the economy managed to come out of the recession.
The recession in UK economy began after it had experienced two quarters of negative growth in the period between June and December of the year 2008. This led to the falling of the GDP by 1.5 percent during the three last months of the year after the previous quarter had dropped by 0.6%. This is the biggest decline in GDP between two quarters ever recorded after the year 1980. This second quarter experienced the biggest fall in GDP within the same period or quarter. This recession lasted for a period of 18 months and it is the longest recession in the UK economy ever. The economy was characterized by an increased public borrowing of up to approximately 178 bn, and the GDP went down by 6%.
Credit Crunch is one of the factors that have been experienced in the UK economy during the recession period. This is an unexpected shortage of money for giving out as loans. As expected this leads to a fall in the amount of loans available. This can be caused by a sudden increase in interest rates, drying up of funds in the capital markets and a control of money directly by a government (Finance Blog, 2010).
In the case of the UK recession, the credit crunch was as a result of a sharp increase in subprime mortgages which originated in America but the result was felt in the rest of the world. In the UK, not many bad mortgages where given out like in the US, as it was better controlled than in the US. This however led to a serious problem for Northern Rock which had a high percentage of loans which where risky. It was not able to raise enough funds when the crisis came by in the capital market. It thus resulted to asking the Bank of England to be given emergency funds. Because of this, the customers did not have faith with the bank any more and they thus started withdrawing their funds from the bank. The credit crunch has resulted in an increase in the price for mortgages in UK where mortgages have become expensive (UK Economy Ltd).
Another factor experienced due to the recession is falling in prices for houses. This is as a result of the high cost of mortgages which has led to a fall in demand for houses. As a result, the price of houses has been forced to come down and this is a show that many are met with a negative equity. When the prices for houses are low, it means that the banks are not able to get back the initial loan. This has affected the firms dealing with such business like Bradford & Bingley which had specialized in buying and letting which is affected by falling house prices.
There is a collapse in confidence in the entire sector of finance. This result in loss of confidence on