Running Head: Economic recession
The US economy will not grow much if at all during the first half of this year and “could even contract slightly”, Ben Bernanke said on 2nd April 2008, admitting for the first time that a “recession is possible”. The chairman of the Federal Reserve said its recent actions – big interest rate cuts and emergency measures to support market liquidity – “appear to have helped stabilize the situation” in financial markets “somewhat.” But he said those markets remained under “considerable stress” (Ben Bernanke).
Private sector employers unexpectedly added to the US workforce last month, providing a degree of reassurance to economists who fear an economic downturn could trigger a sharp rise in unemployment (Krishna Guha, 2008).
A recent Associated Press poll revealed: "Sixty-one percent of the public believes the U.S. economy is now suffering through its first recession since 2001." Housing, lending, airline and some sectors of the automobile industry are the hardest hit. Said Michael G. Shinn, a certified financial planner in Cincinnati Ohio: "An economic recession is a decline in Gross Domestic Product for two or more consecutive quarters of a year. There is higher unemployment, declining personal income and lower industrial production." (Rupert Hart, 2008).
If the recession is caused by a drop in investment, then the AD curve should move to the left, and employment drops below the level of full employment (Figure 1). In the Figure the economy moves from point A to point B. This is how the economy adjusts in the short run.
Medium run adjustment: because employment is below full employment, unemployment is higher and prices have dropped to P1. In the medium run economic agents will start to adjust their price expectations, and expected prices will drop. The drop in expected prices will induce wage setters to set...