Question

As you will notice from your data analysis, the economy passes through different phases and turns. Discuss the implications of a given state (for example, recession) in terms households, businesses, and the entire society as a whole. Share your thoughts as to why it is important for you to understand the different states through which the economy passes. Share personal examples and experiences.

Answer 1

We are going to discuss the implications of Recession in an economy.

We will emphasize effects of recession in two different aspects - Short Term Effects & Long Term Effects.

Short-Term Effects:

Effects on Business-

• In recession we see a fall in aggregate demand. Which can cause a major number of businesses to fail. Therefore a fall in profit or sometimes losses incur at the time of recession.
• Planned investment declines- hitting industries that make the capital intensive goods.
• Recession is profitable for the inferior goods industries. At the time of recession, people tend to inferior goods. So, the demand of inferior goods rises, naturally profits from those goods rises as well.

Effects on Households-

• A steep decline in AD curve, causes a fall in labour demand.
• People (workers) loose their jobs and get unemployed.
• Cyclical unemployement takes place in the economy.
• Real income of households decreases , so that purchasing power also decreases. Which leads to leftward shift of AD curve again and again.

Efeects on the Economy/Society-

• A decline in tax revenues occurs.
• Resultantly, economy suffers from an unusual budget deficit and a rise in national debt.
• Many businesses offer price discounts to off-load excess unsold stocks. So price level shifts downwards and inflation decreases.
• A deep recession risks causing a period of sustained deflation as well.

Lone-Term Effects:

• Cyclical unemployment in Short-Term can cause structural unemployment in Long-Term.
• Low rates of investment can reduce the size of capital stock.
• Persistent budget deficits and rising national debts leads to austerity (cut in public services).
• Falling real wages hits average living standards and reduce demand.
• Recession makes the inequality gap more broader.