Problems in Preventing a Recession

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In a recession, fiscal policy and monetary policy can, in theory, be used to increase aggregate demand and boost economic growth. However, in practice, there can be many difficulties with preventing a recession. If the world economy was to get close to recession in 2020, could policymakers act decisively to prevent a recession?   Factors …

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How to avoid a recession

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A recession is a fall in real GDP/ negative economic growth. To avoid a recession, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession. The primary policies …

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Who Benefits from a Recession?

Readers Question: Identify and explain economic variables that may be affected positively by the economic slowdown. A recession is a period of negative economic growth. It is a period of higher unemployment, falling wages and higher government borrowing. It generally causes economic costs But does anyone benefit from a recession? Some people who may do …

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Difference between Recession and Deflation

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Readers Question: What is the difference between a recession and deflation? A recession is a period of negative economic growth. The official definition is a decline in output (Real GDP) for two consecutive quarters.   Usually, in a recession, you will get a fall in the inflation rate. From 2010, there is a fall in …

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How Long Do Recessions Last?

Readers Question: How Long do Recessions last?

There is no exact answer. Recessions can last for varying time lengths depending on the causes and also the response of governments and consumers.

  • If recessions are caused by a tightening of monetary policy (higher interest rates to reduce inflation), then it tends to be easier to get out of a recession, as the interest rate rise can be reversed and this will boost demand.
  • If the recession is more of a balance sheet recession (bad debts, falling asset prices, bank losses), then the recession will tend to last much longer. For example, in 2009, interest rate cuts were insufficient to boost demand.

Examples of Recessions

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Comparing different recessions

The Great Depression

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The Great Depression started in 1929 – by 1933 there was an economic recovery – though GDP did not recover its pre-crisis peak until 1936.

The Great Depression which started after the wall street crash in 1929, lasted for several years in the US. The length of the recession was due to several factors including:

  • Before the depression, there had been growth in private consumption and debt, which left individuals and firms exposed.
  • Global nature of depression. Many countries increased tariffs to try and protect domestic industries, but this caused lower global trade.
  • In response to depression, Government’s tried to balance the budget by increasing taxes, but this caused lower spending..
  • Negative Multiplier effect.
  • Allowing banks to fail, which led to a sharp fall in the money supply and lower aggregate demand.
  • Lack of economic stimulus
  • In 1937, there was a recovery in the US, but a tightening of fiscal policy pushed the economy back into recession

See also: The Great Depression

In recent years, recessions in the UK and US have lasted for shorter time periods.

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UK recession 1981 was severe for the manufacturing sector but lasted less than a year. However, unemployment persisted at close to 3 million for another five years.

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Why is US in Recession? (2008)

Readers Question: Why is US in Recession?

According to the latest statistics provided by the Economist April 24th 2008

  • US economic growth is 2.4% year on year.
  • In the last quarter, growth is 0.6%. This is still a long way off the technical definition of a recession – negative economic growth for two consecutive quarters.

Nevertheless people have been predicting that the US will soon enter into recession. This is because

1. Credit Crunch. Banks have lost money in lending sub-prime mortgages, which involved high levels of defaults. It is not just mortgage companies who have been affected, but, banks who lent to the mortgage companies. The result is that there is a shortage of funds for borrowing and bank lending has become more difficult.

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