There are two types of recessions. The first occurs when output falls significantly below the full employment level due to a decline in aggregate spending by consumers and investors, resulting in high unemployment. This type was seen in the Great Depression. The second type occurs when the economy's potential output falls, such as due to a minimum wage increase or decline in productivity, and the economy may still be fully employed but output declines. Recessions are explained by different schools of thought - Monetarists see declines in the money supply as a cause, while Keynesian economists emphasize reductions in total spending and rigid prices leading to lower output and recessions.

1. How Recession Affects
Economics, Individuals,
Business And Others?
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Recession

2. In Economics, Recessions Can Be
Found In Business Cycles.

3. Business cycles are the total ups
and downs of an entire nation or
possibly the entire world from time to time,
over a period of more than 10 years.

4. Recession in Economics is considered to be a
decline in economic activity.

5. An economy operating at its potential level is said to
be at full employment. At full employment,
some unemployment occurs.
This is consistent with the shifting of workers between
jobs due to changing tastes and technology.

6. A recession occurs when GDP falls
significantly below its full employment level.

7. The Department of Commerce defines a
recession as when real GDP declines for
two consecutive quarters.

8. Two types of recessions occur:-

9. Output can fall if the
economy is operating at
below its potential (full
employment) level.
1
Output can fall if the
economy’s potential
level of output falls. 2

10. The first type of recession occurs when output
falls significantly below its full-employment level
in a recession.
Unemployment grows as a large
number of workers cannot find work.
1

11. The most dramatic recession of this type was
the Great Depression, where 25 percent of
the workforce was unemployed and real output
fell more than 30 percent.

12. This type of recession usually occurs when
consumers and investors reduce their aggregate
spending.

13. The second type of recession occurs when the
economy’s potential output falls.
For example, a nation that passed a minimum
wage of $2000 will likely experience massive
unemployment and a recession. Its potential
output has decreased.
2

14. As another example, a decline in efficiency or a
decline in technological progress could cause
output to fall.
Even if unemployment rises, the economy may
still be fully employed in the sense that
employers are fully hiring all workers they can.

15. Decline due to full-
employment output falling
below its full-employment
level.
Decline due to full-
employment output falling.
The difference
between
Is
CRUCIAL

16. The first type of decline fits recessions
described by Keynesian and monetary
economists, each giving different
reasons for the decline in spending.
The second type fits recessions described
by rational expectations economists,
who give different reasons for the
decline in full-employment output.

17. Why Recessions occur

18. Two startling facts exist about modern
capitalistic economies.
The first is that they have
recessions
The second is that most of the time they are
not in recessions.

19. This suggests that some
cause occasionally derails
the economy.
Yet, over time, the
economy rebounds to full
employment.

20. But how can an economy recover?
The explanations are given below.

21. Monetary Economists
This school of classical economists observes that
sudden and large decreases in the money supply or
decreases in the rate of monetary growth usually
precede recessions.

22. While the economy naturally tends to be fully
employed, sudden unexpected declines in the money
supply will decrease total spending, decreasing the
economy until people and prices can adjust to having
less cash.

23. Keynesian Economists
John Maynard Keynes emphasized the importance of
total spending and the components of total spending
(consumption, investment, government spending and
net exports). In particular, he felt that when people
reduced consumption spending to save more,
financial markets in times of uncertainty would be
unwilling to spend the new savings on investments.

24. Keynesian Economists (Continue)
The result would be a decrease in total spending.
Keynes also believed that prices are sticky – resistant
to changes. The mix of less spending and fixed prices
means lower output and a recession. Keynesian today
put a similar emphasis on total spending and the
rigidity of prices for explaining the business cycles.
Keynesian Economists (Continue.)

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