Question

What would happen to the following variables if the economy entered a recession phase?

a. Income

b. Investment

c. Demand for durable goods

d. Unemployment rate

Answer 1

A. Income- Will fall. Both the national income and per capita income will fall. Recession means the national output (GDP) of the country will go down. As economic activity goes down, total income earned will fall.

B. Investment- Investment will also fall. A falling GDP and income means that the investors will get lower or negative returns on their investments. Most investor would not want to invest in an environment where future returns are low and hence investment will fall.

C. Demand for durable goods- Will fall. As incomes fall, people would focus on necessary goods and services first. These include food, housing, rent, healthcare etc. Duable goods are goods which are not for immediate consumption. These include home appliances, furnitures etc. These will become low priority for people as incomes fall and their sales will fall.

D. Unemployment rate- Will rise. Lower incomes will lead to lower demand which will lead to lower production. This is a viscious cycle which feeds into itself. Lower production will result in lower employees required, hence people will get laid off. This will result in further lowering of incomes and the cycle will continue. As more pepole get laid off, unemployment will rise.