Why do recessions happen?
Show answer & explanation
Answer: Spending drops cause spiral
People suddenly stop working — Wrong. People don't stop working voluntarily—they get laid off because businesses see reduced demand. Recessions start when spending decreases, causing businesses to cut production and jobs, which further reduces spending.
Spending drops cause spiral ✓ — Correct! Recessions are self-reinforcing cycles. When people spend less (fear, uncertainty, debt), businesses sell less and lay off workers. Unemployed workers spend even less, causing more layoffs. This downward spiral continues until confidence returns or government intervention (stimulus, rate cuts) breaks the cycle.
Banks close for no reason — Wrong. Banks don't arbitrarily close. During recessions, some banks fail because borrowers can't repay loans due to job losses. But bank failures are a symptom of recession, not the cause. Recessions start with reduced consumer and business spending.