Question

The current economic expansion has lasted for more than10 years. What

changes might you observe in the economy when the expansion ends?

Answer 1

Solution-

When the expansion phase ends, as there is more and more production, inputs used in the production activities become scarce. As a result of it, input prices will rise. This will induce the producers to raise the output prices again. As output prices rise, demand by the consumers fall.

Now, Demand has fallen but the producers still anticipate higher levels of demand ( as the expansion period has just ended) so their maintain their existing levels of production and investment. Thus there is a mismatch between demand and supply. Supply exceeds demand and due to this prices fall down. Producers hold back future investment plans and cancel all the existing orders. Producers take the workers out of their jobs due to loss in profits and less production. Thus there is rise in unemployment levels in the economy. Producers futher reduce the prices of their products in order to dispose off their excessive materials which they had produced. Consumer's expect further reduction in prices and postpone their purposes. Aggregate demand falls. The gap between supply and demand widens.

Thus the economy transits from expansion path to recession part and reaches the extreme recession ( depression). Growth rate becomes negative and there is massive unemployment.