What happens in a recession
In: Economics
It means that the velocity of money has slowed significantly.
What is the velocity of money? Let’s say I spend 10 units of currency purchasing a widget from someone. they then buy something themselves using that 10 units of currency from someone else. That initial 10 units of currency was responsible for 20 units of economic activity. If you extend the chain that same unit of currency can generate significantly more economic activity than it’s actually worth. This is the velocity of money.
Ideally you want each unit of currency to travel as far as possible because every time it does it’s stimulating the economy. If someone in the chain decided to hold on to it for some reason this temporarily halts the chain and the associated economic activity that it would have created. The velocity of money is constantly changing but sometimes there’s a larger than average decrease and this is when you start to hear talk about recessions. It basically means that people are generally speaking holding onto money instead of spending it and as a result economic activity suffers.
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