ECO120 MacroeconomicsRod Duncan

Lecture 2- Some actual economics

Tutorial sign-ups– The tutorial sheets will be put up outside C2-

232 on Monday in the second week and on INTERact.

Global financial crisis (GFC)

• Late 2008 some financial problems started to appear in US and European banks.

• Several banks and investment firms were bankrupt (not enough assets to cover their liabilities)- and had to be rescued by taxpayers.

• This banking crisis translated into a macroeconomic crisis as banks started to cut back on their lending for new projects.

Impact of the GFC

• The GFC has had a major impact on the economies of developed and developing countries in late 2008 and 2009.

• European countries and the US have been severely impact, but Australia has not been as badly affected.

• Let’s see what the impact was, and then let’s try to understand what caused the crisis in the first place.

Macroeconomic variables

• The data we will look at over the next few slides are variables we typically study in macroeconomics: Gross Domestic Product (GDP), unemployment, employment, exchange rate, shareprice indices, etc.

• The following data (up to March 2009) is from the Reserve Bank of Australia website at www.rba.gov.au.

So what happened?

• There is a lot of misinformation about the GFC floating about. The GFC has been blamed on capitalism, greed, stupidity, poor regulatory oversight, etc.

• To a small extent, all of the above are partially correct. But the primary cause of the GFC was mortgage lending by banks to people who traditionally could not get home-loans- the poor.

• Here’s how…