Question 7 Answer
A recessionary gap is a situation where an economy is performing below its potential GDP. The country’ real GDP is below the level that the government or policy makers would want it to be and so there is a recession.
A recession is known by the following factors:
-Reduced business activities.
-Leads to unemployment.
-Leads to reduced income for households.
-Rise in poverty and reduction in living standards of the citizens.
Causes of a recessionary gap:
-Natural disasters such as hurricanes which destroy business places, homes and infrastructure.
-Social instability like crime – resources are utilised in fighting crime which could have been used in production of good and services.
-Increase in prices of critical raw materials such as oil. The cost of production rises for firms who may decide to cut production levels and reduce staff (unemployment).
Corrective measures for Recession include:
-Increase spending and creating employment by contracting persons to fix damaged infrastructure.
-Reduce taxation on businesses and consumers to make operations and consumption items cheaper.
-Invest in alternative energy sources to reduce dependence on oil. As oil get scarce the more expensive it will become and the more production will fall. Jamaican government is encouraging persons to invest in solar energy sources now (example from the Caribbean).