Why does an economic Recession occur?

An Economic Recession occurs when there is a fall in GDP for more than two successive quarters. This causes the unemployment rate also to increase.

Recessions' nature and causes are both obvious and ambiguous. In essence, a recession is a series of business failures that co-occur. Companies are forced to reallocate resources, reduce production, limit losses, and, in most cases, lay off workers. Recessions have these apparent causes.


There are a few theories about why recessions occur-


High-Interest Rates

High-Interest Rates make it expensive for consumers to borrow money from the bank and make saving more attractive. This causes a decrease in consumer spending in the economy, which results in a fall in Aggregate Demand. This fall in Aggregate demand will lead to a fall in GDP as there will be a decrease in output produced.


Loss of Consumer and Business Confidence

Consumers lose confidence and have a poor future outlook as they either expect prices to rise or their incomes to fall. As a result, rational consumers will tend to reduce their expenditure and increase their savings which will cause the Aggregate Demand to fall, and as a result, this will lead to a recession. When Businesses lose confidence in the economy, they will invest less, and (Investment is a significant component of Aggregate Demand) prolonged lack of investment will cause Aggregate Demand to fall, leading to a recession


Deflation

Prices falling over time have a worse effect on the economy than inflation. Deflation reduces the value of goods and services being sold on the market, which encourages people to wait to buy until prices are lower. Demand falls, causing a recession. Deflation caused by trade wars aggravated the Great Depression[1]


Economic Shocks

Unpredictable and Natural events that can cause economic disruption can lead to a recession. The latest example would be the ongoing Covid-19 Pandemic.


[1] https://www.thebalance.com/causes-of-economic-recession-3306010

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