Dr. Strangelove gave a speech in PSU recently during which he claimed: \"Firms a

Question

Dr. Strangelove gave a speech in PSU recently during which he claimed: "Firms and other investors should treat recession 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: the cyclical unemployment is temporal and will eventually go back to zero; the price level will go down during a recession which means a value increase of local currency; and 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. Strangelove.

Explanation / Answer

It is true that recession creates an opportunity for new businesses to start operation as they can buy at low prices due to poor demand situation and they can sell at higher prices when the demand surge. But, what about the existing firms who have already stocked their inventory with products and demand is coming down. They also laid off the employees. It further worsens the recessionary situations. Also, it is the demand that creates supply as learnt by the Keynesian economic theory and great U.S. depression of 1934. Thus, there is a need of government intervention to reduce the length of a recessionary period.
It is also true that the recession is followed by recovery and expansion as a part of the business cycle. But, it does not even out each other as the economy rolls back and new process of economic development starts. Also, the aim of economy is to grow and create more opportunities than ever rather simply making break even. Thus, a government intervention in the form of monetary policy and fiscal stabilizers is required to stimulate the demand. It helps economy to recover faster and move ahead towards the boom.
Also, Coming down of prices does not mean the currency appreciates. Appreciation of currency is related to its relative demand in comparison to other foreign currency. If local currency is demanded by the overseas investors, its value will appreciate. It only happens when an economy grows. A dampening economic scenario is not going to help anyone.

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