Readers Question: What does a Recession mean?
How does the recession impact:
In a recession, private sector savings tend to rise. This is because people become more nervous to spend. The spectre of unemployment encourages people to save more and spend less. However, the rise in private sector saving may be offset by a fall in public sector saving (i.e. government borrowing increases to try and stimulate the economy)
Consumption will tend to fall because people are worse off.
Investment will fall. Usually investment is highly cyclical. Therefore, a recession causes a bigger % fall in investment than consumption. Confidence is very important to investment so in a recession, investment tends to dry up.
4) goverment spending
Automatic fiscal stabilisers will cause government spending to rise. e.g. in recession, government have to spend more on unemployment benefits. Also the government may pursue expansionary fiscal policy to try and increase aggregate demand e.g. spending on infrastructure projects.
5) aggregate demand
Aggregate demand is falling in a recession
See also: Impact of recession