Question

1. Why do you think that recessions are unpredictable?

2. What is the classical view of money’s role in economic fluctuations? Do most economists agree with the classical view?

3. Illustrate a graph with aggregate demand, short-run aggregate supply and long-run aggregate supply all intersecting. Then, show what happens in the short-run when the government increases taxes. What happens to the price level and output in the short-run? Finally, adjust the short-run aggregate supply curve so that we are back in long-run equilibrium. What is the long-run effect of the increased taxation on output and the price level? Be sure to include your illustrations.

4. What is stagflation? What causes stagflation in the AD/AS model?

Answer 1

Q) Recession primarily means fall in the GDP. If the growth rate of an economy declines in two quaters successively, then economy is said to be going through recession. It is driven by both demand and supply side factors. Any unfavourable changes which negatively affect demand and supply factors end up resulting in recession. For example: Nobody knew that the global economy would be so badly hit by COVID-19 which ultimately puches almost all evonomies in the negative growth zone. The disruption in supply chains and lack of demand of various types of goods lead to fall in the GDP of countries across the world.

Supply side factors like increase in the price of oil leads to inflation and erodes the purchasing power so Consumer spending falls which lead to futher fall in the GDP. So these events are unpredictable and thus affect economy negatively.