Answer to Question #120437 in Macroeconomics for Rana Taha

Question

2 Following a stock exchange crash in 1987, there was a temporary fear of
a recession because of an anticipated reduction of consumption expenditure.
(a) What was the basis of this fear?
(b) Was the fear justified?
(c) Would things be any different now?

Answer 1

a. The fear was out of stock exchange crash spilling globally which could have caused a decline in global econimies. It was initially caused by agreement by agencies (Foreign Trade Agencies, Louvre Accord)that wanted the dollar's value to depreciate.

b. The fears were invalid as they were based on theoretical claims of falling stocks without economic data to support these claims.

c. Currently the market has mechanisms to prevent a repeat of the 1987 crash. Also, there is more access to information by investors which enhaces better decision making in the stock market