Answer to Question #236467 in Finance for Precilla

Question

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2.1 Discuss the stages of a financial crisis in an emerging economy.

 

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2.2 Explain how a financial crisis may be prevented in the emerging economies

Answer 1

2.1

Stages of a financial crisis :

-The meltdown of the subprime mortgage market- this is caused by the sharp increase in high-risk mortgages which end up into default.

-Spillovers into broader credit market leading to financial distress

-The liquidity crisis- is a simultaneous increase in demand and decrease in supply of liquidity.

-Commodity price bubble- a situation where demand for commodity far exceeds the supply such that it inflates the price for the product higher than it should be.

2.2

Increase capital requirements for shadow banks and depository institutions

Eliminate liquidity requirements. Improve consumer literacy and restrict consumer leverage.