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When inflation was high also the recession was high how
these two contradictory things occur at a same time
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Answer Posted / s balasubramanian
When the inflation is high, prices go up and money value is
depreciated. What paid earlier for which you have to pay
more for getting the commodities. Purchasing power of
people is coming down, which in turn reduced demand.
Due to reduced demand Industry cannot use its full capacity
and with less production recession starts. With onset of
recession, again liquidity in the market is tightened.
It is all chain of events. If liquidity is good, people
will mind for paying more. Example is Real estate boom
which we witnessed earlier. With high inflation and
recession, money circulation is reduced and people are not
able to commit for long term.
That is the main reason, RBI has injected money into the
market by reducing the interest rates and also cutting down
the CRR etc.
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