•Recession•

Diamond Secondary School

Economics
Christmas Term 2025
Grade 11 Pelican & Eagle

Group members: Janiha Smith (Pelican)

Gabrielle Barnwell (Pelican)
Maharani Hariprasad (Pelican)
Jadon DeSantos (Pelican)
Enardo Elliman (Pelican)
Naomi Calvan (Eagle)
Justin DeSantos (Eagle)
What is a Recession?
A recession is a period during which the total output in the economy declines.
During a recession, firms are producing less, so national output decreases. As
firms are producing less, it means that firms will use less factor inputs, including labour.
Unemployment grows during a recession. A recession is short term, lasting some months or
up to a year. A recession can develop into a depression, lasting several years. A depression is
falling national output over several years, with high levels of unemployment.

Causes of Recession

1.​ Trade or Business Cycle

Economic activity increases and then declines over time. This
is called the trade cycle. Economic activity will not simply increase all the time. The peak of
economic activity is called a ‘boom’ and the trough (lowest point) is called a ‘depression’ .
As the economy slides from a boom, this is a recession.A recession signals the end of the
boom stage of the trade cycle. At the point at which economic activity declines, this is the
onset of the recession.

●​ During a boom, demand is increasing. This increasing demand will fuel inflation.
As the government puts in place deflationary fiscal and monetary policy, this will
cause aggregate demand in the economy to fall. Prices will stabilise but there might
be a decline in output and a rise in [Link] is a recession.

●​ Cautious entrepreneurs might feel pessimistic about the future. This might simply
be an instinct that demand will fall in the future. As a result, they might cancel
investment plans. They might even avoid undertaking replacement investment. This
fall in investment will lead to a fall in national output.

●​ The demand of households, firms, government and the export sector might fall.
This will cause aggregate demand in the economy to fall, thereby causing output to
fall.

●​ If firms are not making sufficient profits, they will close down. This will cause a
contraction of national output.
2.​ Contraction or National Output
The contraction of national output is the result of a recession, defined as a decline in a
country's Gross Domestic Product (GDP). This contraction happens when core
components of the economy slow down, primarily due to three causes:

●​ Sharp Decline in Aggregate Demand: A drop in consumer confidence and spending

leads businesses to reduce production and lay off workers, initiating a negative
feedback loop that shrinks the overall economy.

●​ Financial Crises and Credit Crunch: A credit crunch freezes lending, preventing
businesses from obtaining the capital necessary for investment and expansion, which
immediately reduces economic output.

●​ Supply Shocks (Increased Production Costs): Sudden, external increases in

production costs force businesses to either raise prices or decrease the volume of
goods and services they produce, directly contracting the national output.
Consequences of Recession

●​ Falling Output and GDP

During a recession, national output declines, leading to a fall in Gross Domestic
Product (GDP). As a result, the overall standard of living in the economy tends to
decrease.

●​ Rising Unemployment
With falling output, firms require fewer inputs, including labour. This leads to job
losses and a rise in unemployment levels.

●​ Falling Consumption
As unemployment rises and incomes fall, households have less disposable income.
This reduces overall consumption in the economy, which can further depress demand.

●​ Lower Inflationary Pressure

Reduced demand and falling incomes typically lead to lower inflationary pressures. In
some cases, the economy may even experience deflation (a general fall in prices),
although this depends on other factors like monetary policy and supply-side shocks.

●​ Falling Government Revenue and Rising Expenditure

With lower income and consumption, tax revenues from income tax and indirect taxes
(like VAT or sales tax) decline. At the same time, government spending on welfare
and unemployment benefits increases, placing additional strain on public finances.
This may reduce the government’s ability to invest in public services such as
healthcare, education, and infrastructure.

●​ Decreased Business and Investor Confidence

Falling demand and negative economic indicators may lead to lower confidence
among entrepreneurs and investors. This pessimism can cause firms to delay or cancel
investment plans, further weakening economic recovery.

●​ Reduced Imports
Lower consumer income leads to a fall in demand for both domestic and imported
goods. As consumption contracts, import levels also decline, which may improve the
trade balance, though not necessarily in a positive context.
Measures to Reduce Inflation

1.​ Reflationary Fiscal Policy

Reflationary fiscal policy refers to measures used by the government to increase total
spending (aggregate demand) in the economy by raising public expenditure or
reducing taxes.
It is mainly applied during a recession or period of low inflation to stimulate growth
and reduce unemployment.

Under a reflationary fiscal policy, the government may:

●​ Increase Government Spending:
Fund projects such as roads, schools, hospitals, and housing to create jobs and
stimulate demand.

●​ Reduce Taxes:
Lower income, business, and consumption taxes, giving consumers and firms
more disposable income to spend and invest.

●​ Encourage Private Investment:

Offer incentives, subsidies, or tax relief to businesses to promote investment in
production and job creation.

2.​ Reflationary Monetary Policy

Reflationary monetary policy is a strategy used by the central bank to stimulate economic
activity during periods of low growth or recession. It involves increasing the money supply
and lowering interest rates to encourage borrowing, spending, and investment. The policy is
designed to prevent deflation, boost aggregate demand, and restore confidence in the
economy.

How It Works to Reduce a Recession:

●​ Lower Interest Rates:

The central bank reduces lending rates, which lowers the cost of borrowing for
businesses, households, and the government. Cheaper loans make it easier for firms to
invest in expansion projects, for consumers to purchase goods and services, and for
governments to finance public programs.

●​ Increased Borrowing and Spending:

With reduced interest rates, businesses are more willing to borrow for capital
investment, such as machinery, technology, and infrastructure. Households are
encouraged to take loans for consumption, including durable goods, education, and
 housing. The government can also borrow at lower rates to fund social and economic
development projects. These activities collectively increase spending across the
economy.

●​ Higher Aggregate Demand (AD):

As firms, households, and the government spend more, total demand for goods and
services rises. Firms respond to the increased demand by expanding production,
which requires hiring additional workers and purchasing more inputs. This stimulates
economic activity across multiple sectors.

●​ Employment Growth:
As businesses expand production to meet the higher demand, they hire more workers.
Increased employment raises household incomes, which further encourages spending.
This creates a positive cycle where higher demand leads to more production, more
jobs, and higher income levels.

●​ Economic Recovery:
With higher spending, increased production, and rising employment, the economy
gradually recovers from recession. Businesses regain confidence to invest further,
households have more disposable income, and the government can collect higher tax
revenues to support public services. The overall result is a restoration of economic
stability and growth.
Video
What Is Recession? What Causes An Economic Recession? How To Deal With Recessi…

Key terms to note:

❖​ Trade Cycle –The regular pattern of economic ups and downs.

❖​ Boom – A period of high growth and strong demand

❖​ Depression – The lowest point in the cycle with high unemployment

❖​ Recovery – When the economy starts to grow again

❖​ Aggregate Demand – Total demand for goods and services in the economy

❖​ Deflationary Policy - Government action to reduce spending or inflation.

References

1.​ What is a recession?

Gopie, P. (2010). Economics for CXC examinations (pp. 140). Oxford: Macmillan
Education.

2.​ Causes of recession

a)​ The trade or business cycle
Gopie, P. (2010). Economics for CXC examinations (pp. 140-141). Oxford:
Macmillan Education.

b)​ Contraction or national output

Principles of Economics (9th ed.) by N. Gregory Mankiw

3.​ Consequences of recession

Gopie, P. (2010). Economics for CXC examinations (pp. 141). Oxford: Macmillan
Education.

4.​ Measures to reduce inflation

a)​ Reflationary fiscal policy
Gopie, P. (2010). Economics for CXC examinations (pp. 142). Oxford:
Macmillan Education.

b)​ Reflationary monetary policy

Gopie, P. (2010). Economics for CXC examinations (pp. 142). Oxford:
Macmillan Education.