FIN FPX 5710 Assessment 1

Introduction

The fear of recession is a worldwide phenomenon that affects all countries on the planet. The impact of the 2008 global recession, for instance, was severe, touching almost all major sectors. A recession is generally defined as a significant decrease or stoppage of economic activity, leading to an economic slowdown (Bennet, Coleman & Co., 2018). In the past, since the 19th century, the world has experienced 47 recessions. Although it is difficult to point out the exact timing of a recession, some economic indicators may show the potential of an upcoming economic downturn.

FIN FPX 5710 Assessment 1:Gross Domestic Product (GDP)

GDP is a basic indicator of economic performance, computed by summing total consumption, investment, government spending, and net exports (Kramer, 2018). A high GDP typically indicates a healthy economy, while a low GDP indicates a weak economy.

Unemployment Rate

The rate of unemployment is yet another vital sign of recession. Low unemployment rates, associated with high consumer expenditure in the retail industry, typically characterize a healthy economy. On the other hand, high rates of unemployment may signal an economic recession (Mishkin, 2019).

Stock Market

The stock market is a major indicator of recession signals. Since analysts continually evaluate the potential for growth among different industries, an increasing stock market typically implies positive economic times (Mishkin, 2019).

Fiscal and Monetary Policy Adjustments

When faced with economic downturns linked to recessions, the United States adopts a combination of discretionary fiscal and monetary policies. With monetary policy, the central bank is able to control the operations of the banking system to mitigate the effects of the recession. The laws of supply and demand determine prices in the U.S. During times of economic uncertainty, the central bank tends to implement an expansionary monetary policy that boosts the supply of money, increases interest rates, and curtails the provision of loans (McConnell, 2018). This procedure is the strategy used to stabilize prices, lower unemployment, and bring about economic recovery. The government also employs fiscal policy change as another macroeconomic tool to mitigate the effects of recession. By changing expenditure and taxation policies, the government directly affects economic activity. For instance, tax cuts give people more disposable income, thereby increasing consumer demand. In addition, the government can boost overall spending by buying goods and services, and reductions in income and payroll taxes also boost purchasing power (McConnell, 2018).

Keynesian vs. Austrian Economics

Although no economic ideology can totally avoid or reverse a recession, two branches of economic thought—Keynesian and Austrian economics—have alternatives.

Keynesian economics, as described by John Maynard Keynes, believes that government intervention plays a vital role during economic depressions. Government expenditures, according to Keynes, have the ability to sustain the economy when the private sector is unable to do so. The approach focuses on aggregate demand, which comprises consumption, investment, government expenditure, and net export. Keynesian theory suggests that a reduction in income means less demand, because one’s consumption is another’s income. Such a reduction in consumption means fewer sales and higher unemployment rates (Blinder, n.d.). Keynesian theory asserts that aggregate demand is always equivalent to aggregate supply.

In contrast, Austrian economics is against government intervention and instead supports solutions that come from the private sector in times of recession. Supporters of Austrian economics argue that the government is unable to handle economic problems adequately and should avoid enacting policies that interfere with the natural mechanisms of the market (Neck, 2014). They argue that interventions, such as interest rate changes, have the potential to result in suboptimal investment decisions. Austrian economics, on the other hand, emphasizes observing individuals’ actions and market reactions to make future outcomes possible to predict (Vaughn, 2013).

Conclusion

Growth in the economy is nonlinear in nature, involving fluctuations over time and between economies. Despite the differences in the periods of expansion and contraction, economic indicators are key in measuring past recessions and forecasting future occurrences. Key indicators addressed are GDP, unemployment rates, and the stock market’s performance. Keynesian theory primarily informs fiscal and monetary policy responses to economic imbalance in the United States. Through supply and demand management, the government attempts to restore consumer confidence, encourage spending, and facilitate economic recovery.