Dr. Johnson gave a speech recently during which he claimed: “Firms and other inv

Question

Dr. Johnson gave a speech recently during which he claimed: “Firms and other investors should treat recession as a good thing because whenever there is a recession, there will be an expansion and thus they can simply buy low and sell high…Even the government should do nothing during a recession because of the following three reasons: (1) the cyclical unemployment is temporal and will eventually go back to zero; (2) the price level will go down during a recession which means a value increase of local currency; and (3) in the long run the expansion and the recession simply break even and thus there is no impact on the long run growth.”

Use the empirical facts and the impacts of business cycle we discussed in class to argue with Dr. Johnson.

Explanation / Answer

The 3 points stated by Dr. Johnson are wrong. The reason being the following:

(1) The cyclical unemployment is temporal and will eventually go back to zero: Unemployment can never be 0 in any economy. There is some level of unemployment always present, also known as the natural rate of unemployment.

(2) The price level will go down during a recession which means a value increase of local currency: This is true, but does not stand to benefit an economy, especially countries which rely on export-led trade, where a global recession adversely impacts their exports and thus GDP.

(3) In the long run the expansion and the recession simply break even and thus there is no impact on the long run growth: This is incorrect, because the expansion in the long run only comes from the fiscal and monetary policies pushed forward by the country’s government. Secondly, recession is a long term phase and till the time expansion comes or policies start showing effect, the harm is already done.

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