Question

Two macroeconomic variables that decline during a recession: Real GDP and investment both decline

Explain why this happens?

One macroeconomic variable that rises during a recession, Unemployment rises

Explain why this happens?

Answer 1

One of the major causes of recession is rise in inflation. Inflation means overall rise in the price level of an economy. As a result of general rise in prices, people find it costlier to buy goods. Thus they cut out their spending and start saving more. As a result of this economy slows down.

Overall production level decreases as a result of cut in spending of the consumers (as now they are purchasing lesser goods and thus producers are also producing lesser goods). Interest rates become too high because the economy has lesser money to give for investment purposes. Thus investment decreases. As investment and consumption as both part of GDP and they decline thus the overall GDP also declines in the economy.

When due to recession overall production level decreases in the economy, it becomes costlier to pay same amount of workers. Thus with lesser production, employers cut down the extra staff. This happens to every sector in the economy and many employees lose their jobs, thus the unemployment increases in such case.