Question

Considering supply and demand, what happens to each of the following things when the U.S. is under the recssion?

a.) Full employment product output:

b.) Price level for goods: It goes down until a certain price level at which consumers realize goods are cheap and start buying again. This ends the recession.


Can someone please help me with and a.) and also check my response to b.)

Thnak you!

Answer 1

By definition, a recession is a fall in a country's real GDP (for 2+ consecutive quarters).

So, recessions are associated with less than full employment. More to the point, recessions are associated with a decline in spending either by investers or consumers (so shift your aggregate demand curve inward.) As a result, firms reduce labor costs and lay off workers (So, change answer a, recessions are associated with less than full employment)

With a fall in employment, consumers spend less (So shift your aggregate demand curve inward again).

So, bottom line, recessions are associated with a) declining prices, b) less than full employment, and c) falling output.