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Recession - Essay Example

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Summary
Recession can last for some months and it is usually reflected in real gross domestic product (GDP), employment sector, industrial production, wholesale and retail sales as well as real income (Knoop 13). In…
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Recession
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Recession

Download file to see previous pages... Inflation is the general rise in the prices of goods and services over a certain period of time. Higher rates of inflation lead to smaller percentages of goods and services that can be purchased with same amount of money. Inflation occurs due to reasons like varied increment in cost production, national debts, and high energy costs (Knoop 69). During inflation periods, people cut out leisure spending, the overall spending and begin saving more than before. As individuals and businesses curtail expenditures, the GDP declines. Unemployment rates, on the other hand, rise as companies lay off employees to cut costs (Knoop 99). These combinations of factors cause the economy to fall into recession.
In the last few years, the US have been in a recession. The issue was experienced in 2008 after the irrational exuberance in the housing market had directed most people to purchase houses they could not afford. This happened because everyone thought the prices of housing were likely to increase. Unfortunately, the bubble busted in 2006 as the housing prices started coming down (Knoop 104). The shock caught many homeowners who had taken loans with little money to purchase houses unaware. After realizing they were likely to experience losses by selling houses for less than their mortgage, they foreclosed. The shoot up foreclosure rate made most banks and hedge funds to panic. Consequently, those who had bought mortgage-backed securities on the secondary market began realizing they were facing massive losses. Banks began fearing to lend each other by 2007 due to the urge to evade the toxic loans as collateral. What followed was the $700 billion bail out and high unemployment rate in 2008. The economic stimulus plan was launched in 2009 by the US government to spend $185 billion (Knoop 213). It led to alteration of four quarter decline in GDP by Q3 in the same year hence ending the recession. However, high unemployment rates persisted up to 2011 ...Download file to see next pagesRead More
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