IGCSE Economics Paper-2: Specimen Questions with Answers 32 - 33 of 100

Passage

In the recession that began in late 2007 in the United States, the first main element of GDP that faltered was the part of investment called residential structures. When housing prices started falling in 2006, new home construction slowed down. In 2008, this sector had shrunk by more than 40 % from where it had been just a few years earlier.

Question 32 (1 of 5 Based on Passage)

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Short Answer▾

Discuss the factors that cause Recession

Explanation

  • Recession is majorly caused by the fall in the value of real GDP or fall in the aggregate demand.

A demand-side recession occurs due to various factors, like:

  • A financial crisis. Banks reduce lending and investment during the time of shortage in liquidity.
  • An increase in rate of interest – It will increase the cost of borrowing and will reduce the demand.
  • Decline in asset prices – negative income effect will lead to less spending in the economy.
  • Decline in real wages – e. g. inflation outstripping nominal wage increases.
  • Decline in consumers confidence. Also affected by the negative multiplier effect.
  • Increase in rate of exchange – exports will become less competitive.
  • Trade war – Global economic downturn.
  • Supply-side shock, it will lead rise in oil prices and others and will cause inflation and lower spending power.

Question 33 (2 of 5 Based on Passage)

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Short Answer▾

What do you mean by recession and what is the impact of recession on economy?

Explanation

Impact of Recession on Economy is as Follows

Unemployment

A fall in economic output will cause a rise in unemployment.

This is because:

  • Some firms will go bankrupt meaning workers will lose their jobs.
  • Firms will lay off workers to try and reduce costs.
  • Firms will cut back on hiring new workers.

For example, in a recession the self-employed may see a dramatic fall in income, but still not be classed as unemployed.

  • Lower Wages: In a recession, firms will also try to reduce costs by keeping wages low. Some workers (especially temporary workers without contract) will get their wages after a pay-cut of certain percentage. Another cause of lower wages is under-employment. Some workers decide to continue work by keeping their job, but the number of hours is reduced. Thus, they become part time workers instead of full-time workers. (e. g. 18 hours a week)
  • Because of falling tax revenues and rising welfare payments a recession tends to cause an increase in the budget deficit and total government debt.

Government Spending

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