Why recession happens?

Inflation is a major cause to contribute to an economy's fall into a recession. Inflation occurs when there is a general rise in the prices of good and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. The reason behind inflation may be - increased production costs, higher energy costs and national debt.

When inflation happens, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses reduce expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.