Essay On Economic Crisis

Economic crisis is a situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation/deflation. An economic crisis can take the form of a recession or a depression.

Economic crises not only affect the level of economic activities but can also cause financial panic, which lowers monetary policy efficiency with more damaging effects on the economy. A central bank’s main objective during a crisis is to contain the damage and limit the impact of the crisis on the real economy. This can be achieved through various means such as enhancing confidence and calming the market, ensuring uninterrupted flow of credit, reducing uncertainty; ensuring that markets for short term credit function properly, among others. Additionally, central banks also have an important role in reducing the probability of a crisis occurring by undertaking pre-emptive measures that among other things reduce systemic risks. The role played by central bank as a key regulator of the financial sector is, therefore, critical.

The central bank mainly use two different tools during the crisis period, which is Lender of last resort power and

The financial crisis that began to take hold in 2007 significantly affected the way the Federal Reserve implemented monetary policy. Beginning in September 2007, the Federal began dropping its target for the federal funds to near zero. In 10 steps, the target was taken from 5.25% to a band of 0 to 0.25% as of December 2008. And, once the federal funds rate target reached almost zero at the end of 2008, traditional open market operations were no longer able to ease monetary policy further to deal with the