Many factors are said to be the cause of the depression which include the stock market that crashed in 1929, banks failure whereby consumers lost their savings and the failure by banks to provide new loans to stimulate expenditure and investment, reduction in spending as more people became unemployed, policies that were aimed at protecting local firms from international competition by imposing high tariffs on imports and the draught condition at the time.
This paper focuses on the importance of government intervention in a recession. The paper draws largely on Keynes theory which explains the causes of recession and policy measure that are appropriate in a recession, the following is an analysis of the characteristics of a recession.
In the analysis of government intervention in a crisis it is important to first understand what are the causes and characteristics of a recession, recessions are not detected immediately and require observation of appropriate data for a given period of time, an economy has periods of contraction and expansion referred to as business cycles, there are periods when the economy output reaches a peak and periods when the economy contracts and this is referred to as a trough, after the peak the economy is said to be undergoing a recession. A recession may lead to a depression which is much worse, Marichal (1989) states that characteristics of a recession include:
i. Crisis in the stock market
ii. Increased unemployment
iii. Reduced customer spending
iv. Reduced income
v. Reduced production
Given the above characteristics of a recession it is evident that the governments have tools that can be used to improve the above situation; this will involve the use of appropriate measure to improve economic performance, unemployment, income and production.
Fisher (1990) states that fiscal and monetary policies are used by policy makers to fine tune the economy, fiscal policies involves the use of government spending and taxation while monetary policies involves the use of interest rates, reserve ratio and money supply. As discussed above it is evident that the 1930 depression effects could have been reduced if policy makers applied appropriate policies at the time.
An economy experiences business cycles whereby there are periods of economic expansion and periods of economic contraction, this means that production and output will expand in some years while contract in others, in the US for example business cycles are said to last for six to ten years, this means that during this period will be a period of prosperity and periods of economic downturn.
Policies are used to ensure that a recession do not result into depression which much worse than a recession, fiscal policies used will be aimed at increasing aggregate demand which will result into increased output and employment, the following is an analysis of Keynes theory on stimulating aggregate demand.
Keynes theory on government intervention:
According to Keynes (2007) a recession is as a result of a reduction of aggregate demand in the economy, this results into an increase in unemployment and reduced output levels, he therefore advocates for policy measures aimed at increasing aggregate demand, the following is