Question

Suppose that Georgiania was a thriving empire in its golden age. Business was booming and it was the center of international trade under the leadership of Emperor Raphael III. His empire's pride and joy was the trading of green and black tea, and he decreed that their entire economy should be built around it. However, in the mid 1800s, Georgiania experienced a severe economic downturn when the other nations of the world created an embargo on tea from Georgiania, which led to civil strife due to thousands of workers being laid off.
The downward fluctuation in the economy like this is known as
A) Market Failure
B) A recession
C) Economic growth
D) The invisible hand

Answer 1

Answer:

The correct answer is option B.

Explanation:

This downward fluctuation in the economy of Georgiania is an example of a Recession. Recession can be defined as a downward movement in the economic activities which continues for a long period.  

Recession causes a decline in aggregate demand and consumption. It reduces investment and production. This further causes widespread unemployment in the economy.  

For instance in Georgiania, an embargo on tea caused a reduction in net exports. This caused a leftward shift in the aggregate demand curve. This caused consumption and income to decline. This will further cause a reduction in confidence.  

As demand falls investment will decline as well causing unemployment. With the reduction in employment, income will also fall causing a further reduction in demand.  

Expansionary monetary and fiscal policies are required to tackle the recession.