Question

What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions?

Answer 1

Answer:

Financial institutions comprises of banks, insurance companies, stock and bond market, and mutual funds. They aim to make financial markets work by moving funds from savers to people who have productive investment opportunities. A loss in faith in the safety of the financial institutions in the U.S., will result in a credit crunch/liquidity squeeze which will affect the standard of living adversely. This is because there will be a paucity of funds being saved by households due to uncertainty; this will results in insufficient funds available for investment purposes. Also, organizations and investment bankers requiring capital will not get funded and this will have a downward multiplier effect on the economy. A loss in confidence in the financial system will majorly stifle investment opportunities thereby reducing employment and income. This would mean that the standard of living will fall significantly.

Notably, both domestic and foreign investment will fall. There would be a fall in direct investment and portfolio investment which would definitely affect the health of the economy, also, domestic investment would fall due to lack of funds and capital flight. Again, this would lead to an increase in unemployment, a fall in income, and a drastic fall in living standards.

Explanation: