- April 13, 2020
Economicdownturn, also referred to as the period of recession, is a durationwhen a state’s terms of trade are unfavorable. During this spell,there is reduced trade and industrial activity. The state may beidentified by a decline in Gross Domestic Product (GDP) levels in twoconsecutive quarters. A country also experiences high rates ofunemployment and declining house prices.
Inflationis one of the major causes. It may be caused by the government viacertain activities like the uncontrolled input of money into theeconomy through funding, high energy costs or increased national debt(Jagannathanet al., 2013, p.18).For example, in Venezuela, the central bank has been under heavycriticism for increasing the supply of money in the economy leadingto more than 50% inflation (Serbin, 2014, p.5). Effects of inflationare seen when a certain amount of money can only buy a smallpercentage of goods or services unlike when there is no inflationwhere the same amount can purchase more.
Anothercause is the stock market crash. A state’s tax policy maynegatively affect the confidence in investing leading to the drain ofcapital out of industries and other businesses (Jagannathanet al., 2013, p.12).
Anothercause of economic downturn is the increased rates of interest whichare mostly set in the federal budget. Such instances limit liquidity.That is, citizens cannot take enough money from the banks as creditdue to the high rates of interest and this limits economic growth(Jagannathanet al., 2013, p.23).In the United States, the Federal Reserves increased the interestrates in an attempt to save dollar value. Little did they know thatit was attracting recession in 1980. The Fed had elevated the ratesto address the issue of stagflation.
Conclusively,inflation should be addressed to avoid moments of economic recession.Interest rates should be regulated to avoid limiting money meant forinvestments. Finally, the confidence level of investors should beboosted to encourage many business activities within a region whichwould ensure a healthy economy.
Jagannathan,R., Kapoor, M., & Schaumburg, E. (2013). Causes of the greatrecession of 2007–2009: The financial crisis was the symptom notthe disease!. Journalof Financial Intermediation, 22(1),4-29. Retrieved from http://www.nber.org/papers/w15404
Serbin,A. (2014). Venezuela in Crisis: Economic and political conflictdrivers in the post-Chávez era. GPPACAlert. Retrieved fromhttp://www.gppac.net/documents/130492842/0/GPPAC_Alert_Venezuela_Final27Mar2014.pdf/6a3257a4-2749-43e9-8e83-e289bee86b21