Great Recession: How It Can Be Avoided

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The great economic recession is a period marked by persistent decline in the economic growth of different countries across the globe with the Gross Domestic Product (GDP) contracting within a period that is not less than six months. The 2008-2010 great recession affected the global economy and it arose from the developed economies in the world.

This period is marked by high levels of unemployment, decline in retail sales, real income, GDP, slow growth for businesses, and stagnant wages (Altig Fitzgerald and Rupert 66). When there is high unemployment rate, housing prices decline because of the inability of consumers to meet their obligations.

A normal recession does not last longer than a year but the great recession does, and it is milder than an economic depression. Due to its effects, it is necessary to avoid the great recession at all costs through various measures as discussed in this paper.

An economic recession can be avoided through various measures undertaken by the government given the causes of the recession. To begin with, the central bank or the Federal Reserve should increase the level of liquidity in the economy by pursuing expansionary monetary policies. This involves increased supply of cash in the economy through overnight market operations and reduced interest rates.

A recession is caused by reduced level of consumption in the economy. Therefore, an increase in the supply of liquidity will increase the purchasing power of consumers thereby stimulating the level of production in the economy. This will reduce unemployment while increasing output and economic growth.

The recession can also be avoided by pursuing an expansionary fiscal policy such as increased government expenditures in various sectors of the economy. Such type of a policy would see the government reduce the level of unemployment while increasing the purchasing power of the public.

This will stimulate the level of productivity while leading to economic growth and ending the recession. In addition to increased spending, the government can end the recession through bailout of bankrupt institutions especially the financial institutions that do not have enough credit for lending out to borrowers.

The economy can avoid the great recession through adjusting the bank interest rates according to the projected economic situation. High bank interest rates discourage investors from borrowing and hence the money circulation in the economy decreases.

By reducing interest rates, banks will increase the rate of borrowing and investments since more investors will borrow more funds. This will also encourage payment of bank loans. The government should set an interest ceiling and floor to be applied by commercial banks. This will bring an end to the recession experienced within an economy gradually.

An economy should maintain equilibrium in the balance of payment (BOP), which is the graph showing the trade between a country and the other countries across the globe. To avoid the recession, exports should balance with the imports or even exceed the imports. When imports are in excess, it means that imports are cheaper than the domestic products hence there is excess demand and flow of foreign currency causing economic imbalance in the country.

This leads to unemployment because the products produced by the domestic companies face a low local demand as compared to imports (Tcherneva 120). Therefore, increased imports could end the recession since the high level of exports increases production, reduces unemployment and promotes economic growth.

Works Cited

Altig, David, Terry, Fitzgerald and Rupert, Peter. Okun’s law revisited: should we worry about low unemployment? Economic Commentary. Cleveland: Federal Reserve Bank of Cleveland, 1997. Print.

Lee, Jim. “The Robustness of Okun’s Law: Evidence from OECD Countries.” Journal of Macroeconomics 22.2 (2000): 331–356. Print.

Tcherneva, Pavlina. “Permanent on-the-spot job creation—the missing Keynes Plan for full employment and economic transformation.” Review of Social Economics, forthcoming 2.1 (2011): 112-127. Print.

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Great Recession: How It Can Be Avoided

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