Causes of Recession

Recession can happen as a result of structural changes in the

economy, such as vulnerable or obsolete firms, industries, or
technologies failing and being swept away.

It can also happen due to dramatic policy responses by government

and monetary authorities, which can literally rewrite the rules for
businesses.

The social and political upheaval caused by widespread

unemployment and economic distress can also cause a recession.

High-interest rates contribute to recessions by limiting liquidity, or

the quantity of money that can be invested.

Increased inflation is another factor. Inflation is defined as a long-

term increase in the price of goods and services. The percentage of
goods and services that can be purchased with the same amount of
money falls as inflation rises.

Another element that can lead to a recession is a drop in consumer

confidence. Consumers are less likely to spend money if they
perceive the economy as terrible. Consumer confidence is purely
psychological, but it has substantial consequences for any economy.

Another aspect is reduced real wages, which refers to wages that

have been adjusted for inflation. When real earnings fall, it signifies
that a worker's pay does not keep pace with inflation. Although the
worker earns the same amount of money, his purchasing power has
decreased.

Recession and Gross Domestic Product

GDP is the market worth of all commodities and services generated in
a country over a specific time period. A recession is usually defined
as a drop in gross domestic product (GDP) for two or more
quarters in a row.
Recessions and Depressions- A period of widespread
economic downturn marked by a dip in the stock market, a rise in
unemployment, and a decline in the housing market is known as an
economic recession.

A recession is usually milder than a depression.

Simply put, depression is a long-term state of recession.

Effects of Recession

Budget Deficit

As aggregate demand falls during an economic recession, workers will

invariably lose their jobs. Because of the rise in unemployment, fewer
people pay taxes, resulting in fewer sales tax revenue for the
government. As a result, overall spending of the government rises but
receipts fall, resulting in a budget deficit.

Real Income Declines

As aggregate demand falls, firms are unable to hire more workers and
pay higher wages, resulting in a loss of job chances. Employees, as a
result, have few options other than to accept static or declining
wages.

Companies Close Down-Businesses sell fewer goods and services as

general demand in the economy declines. This places major cost
constraints on enterprises, resulting in higher unit pricing. Above
that, the company has to pay continuous fixed costs such as rent, even
though it is selling fewer things.

If the cost pressures become too high for a company, it will have to
close.

Lower Levels of Inflation

When the economy is in a slump, people demand fewer goods and

services. Businesses respond by decreasing prices in order to entice
customers back, lowering inflation. Usually, there is a substantial
decline in debt at the same time, which reduces the amount of money
circulating in the economy.

Fall in Exchange Rate

When a country enters a recession, central banks lower interest rates

to promote credit demand from consumers and businesses. Falling
stock prices and profits, on the other hand, encourage a capital
exodus from the country.

Due to the economic uncertainty, foreign direct investment dries up,

resulting in a drop in demand and a devaluation of the currency.

Falling Asset Prices-When a country enters a recession, assets such as

house prices and the stock market lose value. As individuals lose their
jobs, revenues plummet, businesses fail, and consumers' disposable
money plummets, the stock market panics and consumers become
increasingly insecure.

Measures to overcome Recession

Tax cuts

Consumers will spend more money if they have more money. This will
create demand in the economy. As a result, more goods and services
are sought, resulting in employment creation and economic growth.

Increase in Government Expenditures

A rise in government spending can give the economy a big boost.

Public works programs and infrastructure investments assist put
money in the hands of people, who can subsequently spend it and help
the economy grow.

Quantitative Easing

Quantitative easing is a strategy used by central banks to flood the

market with new money in the hopes of liquidating credit markets and
making it simpler for financial firms to lend money. If the money from
quantitative easing reaches consumers, businesses, and maybe the
government, it has the potential to boost economic development.
Reduction in Interest Rates

 By cutting interest rates, the central bank effectively puts more

money in the pockets of individuals and companies, encouraging
savers to spend.
 Lower interest rates also indicate that enterprises will have to
pay back less money, which will help the company's cash flow.
 These lower rates also make borrowing less expensive, allowing
businesses to invest in better equipment.

Conclusion
The economy as a whole crumbles as a result of the recession. To
combat the threat, most economies loosen their monetary policies by
injecting more money into the system or raising the money supply.

What is Stagflation? - Stagflation is defined as an economic

situation when it is suffering both an increase in inflation and a
stagnation in economic output at the same time.Stagflation
was initially identified in the 1970s, when an oil shock caused
fast inflation and significant unemployment in many industrialised
economies.The misery index was created as a result of stagflation.
When the economy was hit by stagflation, this index, which is the
simple sum of the inflation and unemployment rates, served as a tool
to show just how bad people were feeling.

Causes of Stagflation
Stagflation can be caused by a number of factors.

 Decline in Consumption: A decline in consumption contributes

to stagflation. Consumption decreases as a result of lower income
and fewer jobs giving way to slower growth and even more
inflation.
 Oil Price Volatility: The volatility in oil prices results in a
further reduction in spending. An increase in oil prices results in
a rise in transportation costs, which leads to an increase in
overall pricing, particularly for food items.
  Decrease in credit availability: Less money in the economy
leads to reduced investment. This results in reduced industrial
activity impacting economic growth.
 Unemployment: Unemployment impacts the buying ability of
individuals. The increased automated production and inability of
the manufacturing sector to boost up the growth also impacts job
growth of the country.
 Inflation: With rising input costs and reduction in supply, prices
of various products and services increase. As the supply is
reduced, there is a fall in output and employment and the price
level rises.

Consequences of Stagflation
The trifecta of slow growth, high unemployment, and fast inflation
puts significant pressure on the economy. Stagflation is
unambiguously harmful to the economy, as high inflation and inflation
uncertainty distort investment decisions. It is also damaging to fixed
income markets, as rising interest rates push bond prices lower and
depress equity valuations.

Steps needed to control stagflation in Indian

economy:
 Tax Measures: Reduced income and corporation taxes are
the best policy measures since they tend to lower labour costs
and increase demand for labour.
 o In the same way, taxes like GST should be cut in order to
keep prices from growing.
 Pay control: To limit wage increases, a wage control
strategy should be implemented with government intervention.
Firms are forced to reduce production and employment when
wages rise.
o As a result, real income and consumer spending have
decreased. Limiting salary rises can assist to break the
wage inflation cycle and strengthen the economy.
 Supply-side solutions: Increasing aggregate supply through
supply-side policies such as privatisation and deregulation to
boost efficiency and lowering production costs is one way to
combat stagflation. Tax incentives must be used to encourage the
private sector to spend more and expand supply.
 Monetary policy: Inflation reduction should be the major
macroeconomic goal. In the short term, lowering inflation may
result in increased unemployment and slower economic growth.
However, once the price level is under control, this
unemployment may be targeted.
 Reforms in the labour market: Frictions in the labour market
should be addressed by reducing the time and cost of acquiring
information about job openings. Barriers to entry into a
profession should be reduced, as should those that keep pay
artificially high.