Reasons for Economic Recession and Depression


There are many factors that causes economic recession or depression. The most common reason for economic reason is mostly political, the Government and its Central Bank decide to stimulate the economy. The GDP of a country can shrink drastically. This means the output and wealth of its country is also shrinking. If this pattern last for 6 months, then we can consider it a recession. If it last longer than 6 months, and becomes severe then it is termed as a Depression.

The Government can try to minimize recession and stimulate growth through the following policies:

  1. Fiscal Policy. This includes actions such as Government spending, lowering taxes and racking up budget deficits. The goal of a Fiscal policy is to get the people, company or Government agencies to spend in an attempt to increase output in the country, grow wealth and increase the GDP.
  2. Monetary Policy. It has the same goals as Fiscal policy. But rather focusing on spending it emphasizes the supply of money. The idea is, if money is more available people will do more spending and more investing. This is enacted through:
  • Changes in the discount rate.
  • Changes in the reserve requirement or the amount banks are required to keep on hand
  • Open market operations or by buying bonds and stocks.

All these actions goal is to aim to increase money supply so that consumers and businesses can borrow more easily and consume and invest even more. Most government target an increase in money faster than the rate of growth which can cause inflation or the rise of prices. A small amount of inflation is seen as a good thing and can be an insurance against recession. However, if Governments are too aggressive in increasing the money supply the rate of inflation increases dramatically causing hyperinflation which can be devastating in economic growth.