4.6 (B) Economic Recession Flashcards
What is negative economic growth
decrease in the country’s real GDP over a period of time
What is an economic recession
A relatively short period of time of negative economic growth that may only last for 6 months, max 1 year, after which the economy recovers and continues to grow
What is economic depression
A slump that may last several years during which there is a continuous and substantial fall in real GDP.
What are the causes of causes of recession
Financial crisis
Rise in interest rates
Fall in real wages
Fall in consumer/business confidence
Cut in govt. spending
Supply-side shocks
Black-swan events
Why does a financial crisis cause an economic recession
banks have a shortage of liquidity, they reduce lending and this reduces investment.
Why does a rise in interest rates cause an economic recession
increases the cost of borrowing and reduces demand since people start to save more and spend less.
Why does a fall in real wages lead to an economic recession
usually caused when wages do not increase in line with inflation leading to falling incomes and demand.
why does Fall in consumer/business confidence lead to economic recession
reduces both supply and demand.
Why does a cut in govt. spending lead to an economic recession
when government cuts spending, demand falls. Eg: less unemployment or welfare benefits. People would spend less. Or less subsidies - may lead to increase costs of production. Prices would increase. Demand would decrease
Why would supply-side shocks cause an economic recession
Increase the costs of production. Reduces demand
What and why do black swan events cause economic recession
Black swan events - very unexpected and difficult to predict
They may disrupt demand and supply in a detrimental way that could lead to economic recession (eg covid)
What are the consequences of recession
Firms go out of business: as demand falls, firms will be forced to either reduce production to a level that is sustainable or close shop.
Unemployment: cuts in production will cause a lot of people to lose work.
Fall in income: cuts in production also causes fall in incomes.
Rise in poverty and inequality: unemployment and lack of incomes will pull a lot of people into poverty, and increase inequality (as the rich will still find ways to earn).
Fall in asset prices (e.g. fall in house prices/stock market): recessions trigger a crash in the stock markets and other asset markets as investors’ and consumers’ confidence in the well-being fall of the economy during a recession. The shares owned by investors will be worth less.
Higher budget deficit: due to falling consumption and incomes, the government will see a fall in tax revenue, causing a budget deficit to grow.
Permanently lost output: as firms go out of business and employment falls, it results in a permanent loss of output, as the economy moves inwards from its PPC.
What are the policies that can be used to promote economic growth
Expansionary Fiscal policies
Expansionary Monetary policies
Supply-side policies
Drawbacks to policies that promote economic growth
Demand side policies - could lead to inflation
Supply side policies - can take too much time to come into effect
In recession, supply-side policies won’t solve the fundamental problem of deficiency of aggregate demand.
What is the economic cycle
Pattern of recurrent ups and downs observed in real GDP growth over time in many economies
