Question

Economic theory often is describes an ideal world without frictions, where adjustment to shocks is instantaneous. The real world often involves frictions and lags in adjustment. In the second half of the 19ᵗʰ

century, there were repeated recessions in the economy, often triggered by the collapse of some financial institution and a resulting financial panic. Create a simplified explanation of such a recession using the following concepts: economies of scale, a race by firms to be the largest firm in an industry, the rapid expansion of industrial capacity, financing expansion with borrowed money, lagging consumer demand, business failures, bank failures, panic and general pullback of investment spending.

Answer 1

Recessions in the 19th century were often triggered by the collapse of financial institutions and resulted in a general pullback of investment spending. Concepts such as economies of scale, rapid expansion, financing with borrowed money, and lagging consumer demand played a role in these recessions.

Step-by-step explanation:

Economic theory often assumes an ideal world without frictions and instant adjustment to shocks. However, in the real world, there are frictions and lags in adjustment. In the second half of the 19th century, repeated recessions occurred, often triggered by the collapse of financial institutions and resulting financial panics.

These recessions can be explained using concepts such as economies of scale, a race by firms to be the largest in an industry, rapid expansion of industrial capacity, financing expansion with borrowed money, lagging consumer demand, business failures, bank failures, panic, and a general pullback of investment spending.