Inflation happens when there's a general increase in the price of goods and services over a

specific period of time, and the value of a rupee decreases (also if 1$ = 45 becomes 1$ = 48). In
other words, the demand for product is higher than the supply that's available. Companies can
boost prices, and people are willing to pay those higher prices. This process increases the money
supply (puts more rupee in circulation), but your ruppee doesn't buy as much stuff.
Inflation can lead to a recession.
The textbook definition of recession is when the Gross Domestic Product (GDP) declines for two
or more quarters in a row (six months) or Try this: When a country's economic activity (the
buying and selling of goods and services) slows way down for a long time, it's said to be in
recession.
The GDP is the market value of all final goods and services produced domestically by a
nation's own citizens and firms in a specified period. (Not intermediate products which are
used as input to some other industry e.g. rubber production tyre production. Here rubber
production is an intermediate good which is not considered. Tyres going into car industry is not
considered but sale of tyre directly in the replacement market to car owners will be considered as
a final product)
Final goods and services are goods and services that

Have been purchased for final use

Will not be resold or used in production within the year
For example, food and televisions are final goods; hair stylists and dentists provide final services.
Consumers, however, aren't the only ones who contribute to the GDP. Factories, homebuilders,
exported goods and services, and even the government all contribute to the GDP.
A vicious circle occurs when a country is in recession: People are afraid to spend money or buy
non-essential goods and services. If consumers aren't buying, then companies aren't making
money, and that leads to layoffs and price increases (to make up for falling sales). When people
are out of work, they're afraid to spend money. See where this is going?
Here are some signs of a recession:

Companies make less money; they curtail major purchases like new equipment.
Businesses fail.
Unemployment rises when companies downsize and new jobs are not being created.
Wages and salaries are cut or stay unchanged. (No bonuses! No raises!)

 Retail sales fall because people are out of work and not spending. Or, if people still have
their jobs, they're spending less just in case.

There's a drop in the number of new houses being built for private ownership. This
number is a good economic indicator of how much money the general public has to
spend.
One method that the government uses to curtail recession is to lower the interest rates. Lower
rates make it easier for consumers and businesses to borrow money from banks and spend, thus
stimulating the economy.

Difference between recession and depression.

A recession is defined as period of time characterised by economic contraction
either limited in it's time frame or scope. Depression is a sharp drop in real GDP,
usually 10% plus for three to four years.
What occurs during a recession phase?
Firstly, the stock markets crash. Economists look at market trends to determine
when to expect recessions. It is a fact that a bear market precedes an economic
recession due to stock markets feeling the economic slowdowns months or weeks
before actual contraction in the economy. Luckily the stock markets will also
foretell when the end of a recession is insight.

Rate cutting - Interest Rates are also linked to market behaviour and will also drop
during recessions. The purpose of rate cuts is to stimulate consumer spending by
making money borrowing cheaper and easier. On the other hand stricter regulation
of financial instruments are enforced by the State or Financial Institutions to curb
easy access to instruments or systems.
Secondly, jobs are lost. This is a result of manufacturing companies producing
less product as customer demand is so little often non-existing in some industries.
The first thing a business will do is cut jobs if the required turnover is not reached
after a couple of months. Company's go bankrupt and apply for liquidations in
their thousands, again causing more job loses.
Government intervention - Usually Governments intervene by adopting policies
and introducing rebates and tax cuts. This is another method of attempting to
boost or stimulate consumer spending.

How does the recession impact:

1) Savings
In a recession, private sector savings tend to rise. This is because people become more nervous to
spend. The spectre of unemployment encourages people to save more and spend less. However,
the rise in private sector saving may be offset by a fall in public sector saving (i.e. government
borrowing increases to try and stimulate the economy)
2) consumption

Consumption will tend to fall because people are worse off.

3) Investment
Investment will fall. Usually investment is highly cyclical. Therefore, a recession causes a bigger
% fall in investment than consumption. Confidence is very important to investment so in a
recession, investment tends to dry up.
4) goverment spending
Automatic fiscal stabilisers will cause government spending to rise. e.g. in recession, government
have to spend more on unemployment benefits. Also the government may pursue expansionary
fiscal policy to try and increase aggregate demand e.g. spending on infrastructure projects.
5) aggregate demand
Aggregate demand is falling in a recession
Causes of economic recession
An economic recession is primarily attributed to the actions taken to control the money supply in
an economy. The RBI is the agency responsible for maintaining the delicate balance between
money supply, interest rates, and inflation. When this delicate balance is tipped, the economy is
forced to correct itself.
The RBI sometimes deals with these situations by dumping huge amounts of money supply into
the money market. This helps to keep interest rates low, even as inflation rises. Inflation is the
rise in the prices of goods and services over a period of time. So, if inflation is increasing, it
means that goods and services are costing more now than they did before. The higher the level of
inflation, the smaller the percentage of goods and services is which can be bought with a certain
amount of money. There can be many contributing factors for inflation, which include but are not
limited to increased costs of production, higher costs of energy, and/or the national debt.
In an environment where inflation is prevalent, people tend to cut out things like leisure
spending. They also budget more, spend less on things they usually indulge in, and start saving
more money than they did. As people and businesses start finding ways to cut costs and derail
unneeded expenditures, the GDP begins to decline. Then, unemployment rates will rise because
companies start laying off workers to cut more costs, because consumers are not spending like
they were. It is these combined factors that manage to drive the economy into a state of
recession.
This set of circumstances, coupled with the ability of people to get access to greater amounts of
loan money due to extremely lax loan practices, creates a cycle of unsustainable economic
activity that will eventually grind an economy to a near halted existence.
Effects of economic recession
Generally, an economic recession can be spotted before it actually happens. There are ways to
spot it before it actually hits by observing the changing economic landscapes in quarters that
come before the actual onset. You will still see GDP growth, but it will be coupled with signs like
high unemployment levels, housing price declines, stock market losses, and the absence of

business expansion. When an economy sees more extended periods of economic recession, it
goes beyond a recession and is declared that the economy is in a state of depression.
The only real benefit of an economic recession is that it will help to cure inflation. In fact, the
delicate balancing act that the RBI struggles to pursue is to slow the growth of the economy
enough so that inflation will not occur, but also so that a recession will not be triggered in the
process. Now, the RBI performs this balancing act without the help of fiscal policy. Fiscal policy
is usually trying to stimulate the economy as much as is possible through such things as lowering
taxes, spending on programs, and ignoring account deficits
It all started from USA housing crisis (sub-prime crisis ). The USA financial institutions went on
lending to people for house construction without bothering to verify their repaying capacity. The
houses were pledged with the financial institutions. When the prices of house properties crashed
the loan takers failed to repay the loan, the financial institutions repossessed the properties but
could not sell as prices had crashed. This resulted in huge loss which crippled the USA financial
sector. Many financial institutions went bankrupt. On the whole the entire USA economy was in
turmoil and it went in to recession. As the globalisation has made the world trade interlinked and
as the USA is the richest economy in the world; the countries which were dependant on USA
economy also suffered. Gradually this slow down spread to all parts of the global economy. This
in nutshell is the main cause of global economic slowdown.