Economics For Dummies, 4th Edition

Chapter 16

Understanding Why Recessions Happen

IN THIS CHAPTER

Visualizing the business cycle

The ideal: Letting price adjustments eliminate recessions

The reality: Coping with sticky prices and lingering recessions

Linking slow price adjustments to slow wage adjustments

Introducing the Keynesian model

Macroeconomists’ most daunting task is to try to prevent — or at least shorten — recessions, those periods of time during which the economy’s output of goods and services declines. Economists, politicians, and most other people who work for a living despise recessions because of the toll they exact in human suffering. That’s because when output falls, firms need fewer workers. The typical result is massive layoffs, which cause significant increases in unemployment. In large countries such as the United States, millions of workers lose their jobs and their ability to support themselves and their families.

In this chapter, I use the aggregate supply/aggregate demand model to show you ...