A recession can be defined as a period of general economic decline. This is usually observable through a drop in GDP for two or more quarters. There are many factors which contribute to an economy going into a recession. This includes, a low level of consumer spending. The reasons for the low level of consumer spending might differ, as it may be a result of inflation (a rise in the cost of goods and services), or individuals choosing to save more than they consume. Individuals consume less goods and services which ultimately lead to a decrease in the total output of the economy.
Consequences of a recession include:
- Decline in economic growth.
- An increase in the unemployment rate. Firms are forced to cut the operational costs incurred by paying wages.
- Collapse or poor performance of the stock exchange markets.
- Failure of businesses.
- Financial market failure.
- Decline in house value or prices.
- Increase in loan defaults.
Government reduces the effects of a recession by:
- Implementing appropriate fiscal policies: Government would increase government spending and decrease taxes.
- Implementing monetary policies: Central banks would increase the money supply available for spending or decrease interest rates.
- Creating jobs: Government would try to create as many jobs as possible to reduce the unemployment rate, increasing productivity and ultimately increasing spending.