Factors Affecting The Economy Goes Into A Recession

1.) Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession. a. Two macroeconomic variables that decline when the economy goes into a recession are real GDP and investment spending. GDP will decrease because the economy will be producing fewer goods and services overall. Investment spending, spending on new capital, will decrease in order to conserve and spend in other areas. The unemployment rate is one macroeconomic variable that will rise during a recession. If an economy begins producing fewer goods and services, businesses will need fewer employees to meet the production demand. 3.) List and explain the three reasons the aggregate-demand curve slopes downward. a. Three reasons the aggregate-demand curve slopes downward are the wealth effect, the interest-rate effect, and the exchange rate effect. The wealth effect explains that when the price level decreases, each consumer is wealthier because the real value of his or her dollar has increased. Wealthier consumers spend more, increasing the demand for consumption goods and services. Conversely, if the price level rises, the real value of the dollar will decrease, effectively making consumers poorer. Poorer consumers will spend less on consumption, decreasing the demand for goods and services. The interest-rate effect explains that when the price level decreases, consumers have more money left over after consumption (becauseShow MoreRelatedInflation And Its Effect On The Economy1532 Words   |  7 Pageszero percent, which involves a declining value in the power of currency. 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