What are some of the causes of recession?
Answers
Answer:
Factors that cause a recession include high interest rates, reduced consumer confidence, and reduced real wages. Effects of a recession include a slump in the stock market, an increase in unemployment, and increases in the national debt.
Recessions (a fall in real GDP) are primarily caused by a fall in aggregate demand (AD). A demand-side shock could occur due to several factors, such as
A financial crisis. If banks have a shortage of liquidity, they reduce lending and this reduces investment.
A rise in interest rates – increases the cost of borrowing and reduces demand.
Fall in asset prices – negative wealth effect leads to less spending.
Fall in real wages – e.g. inflation outstripping nominal wage increases.
Fall in consumer/business confidence also exacerbated by the negative multiplier effect.
Appreciation in exchange rate – exports less competitive.
Fiscal austerity – when government cuts spending.
Trade war – Global economic downturn.
Recessions can also be caused by
Supply-side shock, e.g. rise in oil prices cause inflation and lower spending power. (e.g. in 1970s)
Black swan event – this is an unexpected event that is very hard to predict. For example, Covid-19 flu pandemic which disrupts travel, supply chains and normal business activity. A pandemic affects both supply and demand.