Q:

What happens to the economy during a recession?

A:

Quick Answer

Among the many effects of an economy in recession are interest rates falling, profits plunging, unemployment rates rising, and the stock market becoming unstable. People tend to hold onto their money rather than spend it, and financial fears are prevalent.

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A recession is defined as business slowing down over a period of time, usually about six months or longer. Recessions begin for various reasons, but the effects are predictable. Once they are set in motion, a domino effect prevails, with one outcome causing or worsening another. For instance, when unemployment rises, companies start to produce less and have to eliminate even more jobs. Profits fall due to lack of production, and consumers fear buying more than they need. People are uneasy about the stock market and start selling their stocks, causing a panic in which even more people start selling off stocks. When the stock market becomes unstable, businesses become fearful and lay off more workers, leading to worsening unemployment. The vicious cycle generally continues for months. In the mean time, the Federal Reserve tries to get the interest rates to drop in order to stimulate the economy. Because people are reticent to accrue debt, they do not borrow money in a recession as readily, so businesses affected by that sector of the economy begin to suffer. The housing market slumps, and people refrain from buying big-ticket items such as cars. Recessions usually run their course over time, but the major goal is to make sure that they do not cause a depression.

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