The impact of the financial crisis started to be experienced in mid 2007 and in 2008. The main cause of the crisis was the US sub prime mortgages and the downturn in housing market both in US and other large economies such as UK. This consequently led to the credit crunch which made it had for individuals and company to access credit from banks. Banks on their part were reluctant to lend money and had been busy replenishing their capital by sucking money from the economy and this increased the magnitude of the crisis.
The government has been undertaking measures to restore the economy back to growth. While most of the program undertaken by the government affects the macro economy they have also some microeconomic impact (Felton, 2008). One of the policy undertaken by the government include tax rebate program. The policy make good economic sense since it is aimed at stimulating demand. Increase in disposable income held by the household will cause aggregate demand to increase which in turn forces supplies to increase output to meet the growing demand.
Supplies will require additional input in term of labour, material and capital which leads to more employment and economic growth. 2 Increase in consumption – the tax rebate will increase the amount of disposable income held by the household. As disposable income increases then consumers will have available fund to spend on various consumption bundles. The consumption function is illustrated as; C = a + cYd Where C = consumption a = autonomous level of consumption Yd = disposable income c = marginal propensity to consume
Therefore as illustrated by the equation consumption expenditure varies directly with the level of disposable income. Many consumers particularly the poor were forced to cut consumption on essential goods due to financial crisis and such a policy will act as a relief to many who will be able to resume their original consumption bundles. Increase in saving – the credit crunch and recession in the economy made it hard for household to obtain credit from financial institution therefore many resulted to withdrawing their saving to cater for domestic needs particularly those who lost their job.
Where individuals receive an increase in income they have the option of increasing saving or consumption i. e. Yd = C + S. therefore the saving function can be derived from the equation above to get S = Yd – (a + cYd). 3 From the equation there is a direct relationship between increase in saving and disposable income therefore tax rebate will increase saving by individual household.
Increase in value of property – tax rebate will increase the purchasing power of consumers and in a scenario where the economy experience an increase in money supply prices of assets such as shares and house tend to increase. Therefore individual shareholders will benefit from capital gain in addition increase in house price will make it possible for home owners to re-mortgage i. e. taking additional loan based on the difference between the current value of the house and outstanding loan balance.