The financial crisis of 2008-2010 threatened to cause all large banks in the developed countries to go bankrupt and destroy a large portion of the money supply. In response, the governments of those countries increased their expenditures and their central banks flooded their economies with large amounts of newly printed money; money they used to purchase loans from the financial institutions on the verge of bankruptcy. The debts of those governments increased considerably. Some of them flirted with or they were on the brink of bankruptcy (like those of Spain, Italy, France, and possibly that of the US). The economy was on the brink of a depression. Answer the following questions. Justify your answers

a. Explain why the bankruptcy of many large banks would result in the destruction of a major proportion of the money supply given the fact that no rational person would burn her dollar bills or destroy them.

b. Why would not governments trust the natural adjustment mechanism of supply and demand to return their economies to full employment? Explain how the natural mechanism works.

c. Explain why the governments increased their government expenditures when they also allowed their central banks to flood the world with newly printed money.

d. Was it not enough to increase the money supply or alternatively to increase government expenditures?

e. What is the reason that governments of various nations ordered the central bank governors to increase the money supply manifolds? Where they concerned about the crowding out effect? Explain the concept of crowding out effect.

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a The bankruptcy of many large banks would result in the destruction of a major proportion of the mo... View the full answer