Answer to Question #110804 in Macroeconomics for Tshegofatso

Question

Explain briefly reasons that causes the world Economic Crisis in 2008.

Answer 1

Deregulation and the reduction of the interest rate were the main causes of the world economic crisis of 2008. In deregulation, legislations that relaxed the regulation of the financial services sector were passed. For example, the Gramm-Leach-Bliley Act allowed banks to invest in derivatives and the Commodity Futures Modernization Act exempted risky financial products from regulation. In 2001, the Federal Reserve reduced the interest rate to a low of 1.65%, which increased the demand for credit, causing banks to engage in high risk lending practice.