Chapter 12, Problem 1QFT

To determine

Concept Introduction:

Recession: Every economy faces different business cycle at different point of time. Recession is one of such business cycle. During recession, there is huge unemployment and fall in production of goods and services. Recession slows down the business activities.

The main reason for such phenomenon is the lack of demand and low investment level. When the recession is for longer duration it is known as depression.

Causes of Recession: Below given are the causes of recession:

• Rise in oil price: When the price of oil increases the prices of every commodities rises due to increase in input cost.
• Fall in House price: When there is fall in prices of house the wealth of household decreases compelling them to spend less on consumption of goods
• Loss in consumer confidence: This leads to decrease in consumption level as people think that the economy is going through bad condition.
• Credit Crunch: It is the situation when people do not have money to invest or consume as the loans are not easily accessible.
• Rise in Interest Rate: It lowers the amount of investment in an economy which results into low output and employment level.

To explain:

Reason for rise in gas prices during recession and fall in prices after recession.

Explanation of Solution

Gas price rose during the recession of 1970 due to increase in demand for fuel efficient car and the price decrease after great recession because of huge unemployment that reduced the income level.

• During 1970, due to increase in the price of oil people started to demand the substitute goods like fuel efficient car. As a result the demand for such car increased tremendously.

• This led to increase in the demand for fuel because increase in the average of the car was not more in comparison to demand.

• But the price started to fall after great depression because the recession has caused huge unemployment in the economy. This led to fall in demand for cars and as a result for gas oil.