Germany and the Global Crisis 2006-2010

The Global Crisis explained in the AS/LM framework

Term Paper , 2011 , 12 Pages , Grade: A

Economics - Macro-economics, general

When the United States housing bubble collapsed in 2007 and triggered a global financial
crisis this also did not leave one of the economically strongest country in Europe unaffected.
Amongst other, the insolvency of Lehman Brothers (and others) led to a liquidity shortage in
German major banks like the Hypo Real Estate (Müller) and the BAA-AAA-spread increased. In
the following, the performance of Germany during the global crisis from 2006 to 2010 will be
examined in the IS/LM framework and show how the financial and monetary sector reacted.

Inhaltsverzeichnis (Table of Contents)

• Germany and the Global Crisis 2006-2010
• Consumer Confidence
• Business Confidence
• Real Private Consumption and Investment
• Real GDP
• The BAA-AAA Spread
• The IS-LM-Model

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper examines the performance of Germany during the global financial crisis of 2006-2010, focusing on the impact of the crisis on the German economy within the IS/LM framework. The main objective is to analyze how the financial and monetary sectors reacted to the crisis. The key themes explored include:

• The impact of the U.S. housing bubble collapse on German consumer and business confidence
• The role of the BAA-AAA spread in exacerbating the financial crisis
• The effects of decreased confidence and increased interest premiums on investment and output
• The application of the IS-LM model to understand the shift in equilibrium due to the crisis

Zusammenfassung der Kapitel (Chapter Summaries)

• The paper begins by illustrating the effects of the U.S. housing bubble collapse on German consumer confidence. This is evidenced by a decline in consumer confidence starting in the second quarter of 2007. The paper then explores the impact on business confidence, which also experienced a decline starting in the middle of 2007, leading to a further decrease in investment.
• The paper then examines the development of real private consumption and investment in Germany from 2006 to 2010. It is observed that the decrease in confidence led to a drop in consumption and investment, further impacting overall output.
• The paper then analyzes the performance of real GDP in Germany during the crisis. Real GDP experienced a sharp decrease from the beginning of 2008, before showing signs of recovery at the start of 2009.
• The paper further investigates the role of the BAA-AAA spread, demonstrating that the gap between the rates charged by the bonds market for firms with high and low risk ratings started to rise significantly in the third quarter of 2007. This increase in interest premiums contributed to further reductions in investment, as firms became more reluctant to borrow at higher rates.
• The paper concludes by explaining how the decrease in confidence and increase in interest premiums led to a leftward shift of the IS-curve in the IS-LM model. This shift resulted in a lower level of output, as the equilibrium point shifted to a new, lower level.

Schlüsselwörter (Keywords)

The core concepts and themes of this paper revolve around the impact of the global financial crisis on the German economy. Key terms include consumer confidence, business confidence, real private consumption, real private investment, real GDP, BAA-AAA spread, IS-LM model, and equilibrium. The analysis focuses on the economic consequences of decreased confidence and increased interest premiums, exploring their effects on investment, output, and the overall state of the German economy within the context of the global financial crisis.

• College: Utrecht University
• Grade: A
• Author: Nora Görne (Author)
• Publication Year: 2011
• Pages: 12
• Catalog Number: V184343
• ISBN (eBook): 9783656091028
• ISBN (Book): 9783656090885
• Language: English
• Tags: germany, global crisis, is-lm-model, financial crisis, 2006-2010