What Causes an Economic Downturn?

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Mingming Zhang
ECON 220
Assignment 7-1
What causes an economic downturn?
What causes an economic downturn?
An economic downturn defines as the economy being in recession, which is a period of time that economic, won’t grow or even falling. The definition of an economic downturn is less strict than recession. In the economic downturn period, the growth rate will slow down. We can see the house prices falling down and a lot of people lose their jobs. There are some features of an economic downturn: First, the economic grow negatively; second, the unemployment rate rise; third, government borrowing increase; fourth, the business investment falls with no confidence (Economic downturn definition).

GDP growth declining causes the economic turndown. The result of the economic turndown is falling employment, and rising unemployment, which causes a slowdown in retail sales. As we know the closest economic turndown is in 2008. But what caused this economic turndown? First, we will look the house market. Since many people thought the house price won’t go down, they buy houses with different mortgage, which they couldn’t afford. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed.

But the recession of 2001 was caused by irrational exuberance in high tech. In 1999, there was an economic boom in computer and software sales caused by the Y2K scare. After the companies all buying the computer system, the stock price of those companies with high technology started to increase. This led to many of the investors' money going to the high technology companies, no matter if the companies were making money or not.

High interest rates are also a cause of economic turndown. Because high interest rates limits the money that are ready to be put into the investing...
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