Question

Discuss the recession of 2001 in terms of the aggregate supply and demand framework. What supply-side factors may have influenced the recession?

Answer 1

Answer

THE RECESSION OF 2001 WAS A SHORT DURATION RECESSION ENDING IN NOVEMBER 2001. IT WAS A RECESSION THAT SURPRISED THE FORECASTERS. THE RECESSION REASONS ARE DIFFICULT TO ASCERTAIN. HOWEVER, THE SIGNS WERE EVIDENT IN APRIL 2001. HOWEVER, DURING THIS RECESSION THE CONSUMER SPENDING ON THE DURABLE ROSE PRETTY WELL AS COMPARED TO RECESSION. THE MANUFACTURERS WERE EXPECTING A DROP IN SALES SO THEY try TO BOOST THE SALES. LIKE IN THE CASE OF AUTOMOBILE SECTOR SPECIAL FINANCIAL INCENTIVES WERE OFFERED WHICH RESULTED IN A NEAR RECORD HIGH FIGURE OF 21.1 MILLION. ALSO, THE FALL IN SHORT TERM INTEREST RATES FUELLED THE DEMAND FOR DURABLES. HOWEVER, THE DEMAND FROM THE RESIDENTIAL SECTOR MARKET DECLINED DUE TO HIGH MORTGAGE RATES WHICH MIGHT HAVE TRIGGERED THE RECESSION. ALSO, THERE WAS SHARP FALL IN THE EXPORTS TO THE MAJOR ASIAN ECONOMIES THAT RESULTED IN THE FALL OF DEMAND FOR CAPITAL GOODS.

O THE SUPPLY SIDE IF WE SEE THE RECESSION WAS DUE TO THE SUDDEN SURGE IN THE DEMAND FOR PRODUCTS AND THE UNPREPARED NESS ON THE PART OF THE BUSINESSES TO SUPPLY THIS DEMAND. THEY WERE EXPECTING A RECESSION AND THUS INVENTORY BUILD UP WAS VERY LOW. THE INVESTMENT IN CAPITAL STRUCTURES HAS ALREADY REACHED ITS PEAK PRIOR TO THE CYCLE AND THERE WAS AN OVERSUPPLY OF COMMERCIAL STRUCTURES. THERE WAS ALSO SHARP FALL IN THE STOCK PRICES RESULTING IN HIGHER COST OF CAPITAL. ALSO, THE FIRMS HAVE SPENT A LARGE AMOUNT TO REMOVE THE Y2K GLITCH AND THERE WAS ALREADY HUGE SUMS SPENT ON COMPUTERS AND SOFTWARE THAT RESULTED IN LOW DEMAND FOR THIS SECTOR.

IN THE END, WE CAN SAY THAT THE RECESSION OF 2001 WAS OF SHORT DURATION AND IN CONTRAST TO FALL THE CONSUMER DEMAND INCREASED RESULTING IN A SUDDEN CLEARANCE OF INVENTORY FROM SUPPLIERS WHO WERE NOT READY FOR THIS