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Economics (3rd edition): Making sense of the Modern Economy by Saugato Datta

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7 Crisis-time economics

Putting the air back in

Staring at recession, policymakers in rich economies are considering how to avoid a prolonged slump. Here are some options – and some obstacles

DEBT IS OUT; cash is in. Financial institutions are finding it hard to borrow from anyone but the state – and they are reluctant to lend to anyone else. Firms, aware that credit is drying up, are striving to raise cash. They have already run down their inventories and are trimming investment and jobs. Householders whose homes are worth less than their mortgages must save hard to reduce their debts. Those that cannot service their mortgages will default, causing more trouble for banks and, via lower house prices, other homeowners.

In mid-2008, the main worry ...

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