Answer to Question #120438 in Macroeconomics for taimoor

Question

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

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?

The basis of the fear emanated from the ability of the stock exchange crash expending globally and sparking fears for the economic activities to decline. The crash was caused by the series of monetary and Foreign Trade Agreements (FTAs) mots notable the Louvre Accord and the Plaza Accord which were implemented to depreciate the U.S. dollar while adjusting trade deficits.

(b) Was the fear justified?

The fears were only based on declining stock markets without any economic real data to drive the decreases or warrant worry among speculators. The economic data of the period indicated that the GDP improved. In this regard, there was no basis for the fear.

(c) Would things be any different now?

Currently, a looming fear has engulfed speculators similar to the 1987 fears. However, experts assert that the current decline in stock markets are a correction mode as the prices had risen to their highest points since the 2008 financial crisis. In addition, the stock markets have a circuit breaker installed to prevent a similar situation as that of 1987. There is increased information and higher education levels assisted by the social media and allows investors to access information as it occurs and thus make an enhanced decision.