FIN FPX 5710 Assessment 1 Recession Analysis

FIN FPX 5710 Assessment 1 Recession Analysis

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Capella university

FIN-FPX5710 Economic Foundations for Financial Decision Making

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Date

Introduction

The anxiety surrounding recession is a global phenomenon, influencing every nation across the globe. The ramifications of the 2008 global recession, for example, were profound, affecting nearly all significant sectors. A recession is typically characterized as a notable decline or cessation of economic activity, resulting in an economic downturn (Bennet, Coleman & Co., 2018). Historically, since the 19th century, the world has witnessed 47 recessions. Although pinpointing the exact timing of a recession is challenging, various economic indicators can suggest the likelihood of an impending economic downturn.

Recession Indicators

Keynesian vs. Austrian Economics

Although no economic theory can entirely avert or reverse a recession, two distinct schools of economic thought—Keynesian and Austrian economics—propose opposing remedies.

Keynesian economics, articulated by John Maynard Keynes, posits that government intervention is vital during economic crises. According to Keynes, government expenditure can sustain economic activity when the private sector is unable to do so. This approach prioritizes aggregate demand, which encompasses total consumption, investment, government spending, and net exports. Keynesian theory suggests that a decrease in income leads to a reduction in demand, as one individual’s spending constitutes another’s income. This drop in expenditure results in diminished sales and higher unemployment rates (Blinder, n.d.). Keynesian theory maintains that aggregate demand is always equal to aggregate supply.

Conversely, Austrian economics opposes governmental involvement, advocating for solutions originating from the private sector during recessions. Proponents of Austrian economics contend that the government lacks the capability to adequately address economic challenges and should refrain from imposing policies that disrupt the natural dynamics of the market (Neck, 2014). They argue that interventions, such as altering interest rates, may result in poor investment decisions. Instead, Austrian economics emphasizes the importance of observing individual behaviors and market reactions to forecast future outcomes (Vaughn, 2013).

Conclusion

Economic growth is inherently nonlinear, exhibiting fluctuations over time and across different economies. Although periods of expansion and contraction vary, economic indicators play a critical role in evaluating past recessions and forecasting future occurrences. Key indicators discussed include GDP, unemployment rates, and stock market performance. In the United States, fiscal and monetary policy responses to economic imbalances are primarily influenced by Keynesian principles. By managing supply and demand dynamics, the government endeavors to restore consumer confidence, promote spending, and facilitate economic recovery.

References

Bennet, Coleman & Co. (2018). Definition of recession. The Economic Times. Retrieved from https://economictimes.indiatimes.com/definition/recession

Blinder, A. S. (n.d.). Keynesian economics. Retrieved from http://www.econlib.org/library/Enc/KeynesianEconomics.html

Kramer, L. (2018, February 5). What is GDP and why is it so important to economists and investors? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/

FIN FPX 5710 Assessment 1 Recession Analysis

Mishkin, F. S. (2019). Economics of money, banking and financial markets (12th ed.). [Capella]. Retrieved from https://capella.vitalsource.com/#/books/9780134734408/

McConnell, C., Brue, S., & Flynn, S. (2018). Economics (21st ed.). New York, NY: McGraw-Hill.

Neck, R. (2014). Austrian economics today. Atlantic Economic Journal, 42(2), 121–122.

Vaughn, K. I. (2013). Austrian school of economics. In T. Cate (Ed.), An encyclopedia of Keynesian economics (2nd ed.). Cheltenham, UK: Edward Elgar Publishing.