Question

Analyse and evaluate two ways in which the government intervention is able to avoid the worst aspects of a financial crash.

Answer 1

Following are two ways in which the government intervention can help in avoiding the worst aspects of a financial crash:

1. Bailing out firms to stop domino effects: Government can bail out large firms or financial institutions facing bankruptcy. This helps in restoring the confidence of public and investors in the market, business firms, and financial institutions. This also helps in averting a larger crisis and snowball effects. Restoring confidence can help in recovering from the finanical crisis.

2. Saving jobs and reducing unemployment: Increasing government expenditure helps in increasing the aggregate demand (AD) which in turn helps in increasing output. This creates jobs, increases employment level, and increases income. Therefore, government intervention can help create jobs and help people avoid economic hardships.