Economics Assignment Example | Topics and Well Written Essays - 1250 words

Economics - Assignment Example When firms spend less money on expansion, they are infusing fewer funds into the economy which leads to slow economic growth. Stock market crash causes job losses and this highly impacts the economy. During recession firms tend to cut operation costs by firing workers. With less money to spend consumers will not afford durable and luxury items. Hence, unemployment in the long run negatively impact the consumer durable and real estate sectors of economy since it lead to fall in prices in commercial and real estate sectors. Additionally, when investor’s money is lost as result of stock market crash, they tend to spend less. This in essence leads to low consumer spending which negatively affects the economy. Immediately following the attack on the US on 11 Sept 2001, the stock markets plunged and many observers expected a recession in the US (and possibly elsewhere). Using the AD-AS model, explain their prediction. There are reasons that led many observers to predict a recession in the US when the stock markets plunged. Stocks are pieces of ownership in a firm and thus the stock markets are indicator of shareholders’ confidence in the future earnings of these firms. Corporate earnings depend on the stability of country’s economic standing and therefore stock markets reflect how a country is economically stable. Their crash reflects a loss of confidence in the economy and if not restored it leads to recession. This due to the fact that the stock markets crash lead to a fall in aggregate demand (AD) (demand side shock) as a result of less wealth for consumers. In addition, it implies less financing for new projects, since trading of stocks is one way that firms raise funds required to expand. They also predicted a recession in US economy because declining stock markets can kick-start a rise in oil prices which would increase the cost of manufacturing and this in