How turmoil in global financial markets affect the demand

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Reference no: EM13106640

IMF Warning over Slowing Growth

The global economy may face a marked slowdown next year as a result of the turmoil in financial markets, the International Monetary Fund has warned. The IMF said the global credit squeeze would test the ability of the economy to continue expanding at recent rates. While future economic stability could not be taken for granted, there was plenty of evidence that the global economy remained durable, it added.

Assets

Liabilities

(millions of dollars)

Reserves at RBA

25

Current deposits

90

Cash in vault

15

Saving deposits

110

Securities

60

 

Loans

100

 

(a) Explain how turmoil in global financial markets might affect the demand for loanable funds, investment, and global economic growth in the future.   

Bernanke's Asian Savings Glut Theory Blasted

U.S. Federal Reserve chairman Ben Bernanke says that high saving rates in Asia (that he called a "glut of savings") were to blame for the extraordinarily low bond rates during the first half of the "noughties", as well as U.S. soaring house prices and current account deficit. Claudio Borio, research director at the Bank for International Settlements, says Bernanke is wrong and excessive lending by financial institutions caused low interest rates.

(b) Graphically illustrate and explain the impact of the "glut of savings" on the real interest rate and the quantity of loanable funds.  

(c) How do the high saving rates in Asia impact investment in other countries?

Reference no: EM13106640

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