Continuing our discussion on understanding the differences between an economic slowdown and recession, Finance and Investment Society, Ramjas College brings to you a quick explanation of what a recession really is.
A recession is a business cycle contraction in which there is a negative disruption to the balance between supply and balance, which prompts an economic decline. A national recession is generally demarcated by two-quarters of negative GDP growth. A global recession, however, is much harder to identify. A recession is short, lasting for about 9 to 18 months, however, its impact can be long-lasting.
A recession can be caused due to various interconnected factors, the most significant of which are:
1. High-Interest Rates – as they reduce liquidity and the amount available to invest
2. General Inflation – as the number of goods that can be purchased with the same amount of money reduces
3. Reduced Real Wages – the purchasing power of the individuals reduce.
A recession generally results in widespread unemployment, a fall in consumer purchases, and business contraction.
Governments usually respond to a recession by adopting expansionary macroeconomic policies, such as increasing government spending, decreasing taxation and increasing the money supply.
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