Final answer:
During recessions, investment typically falls by a larger percentage than GDP, as businesses reduce expenditures in anticipation of lower consumer spending and uncertainties. Investment is highly sensitive to economic conditions and reduces more significantly compared to the overall economy during economic downturns, although the exact percentage can vary with each cycle.
Step-by-step explanation:
During recessions, investment typically falls by a larger percentage than GDP. This phenomenon occurs because investments in areas such as capital goods and new construction are highly sensitive to the economic climate. Businesses tend to cut back on these types of expenditures significantly when they anticipate lower consumer spending and uncertain economic conditions.
Recessions are characterized by a period in which there is a significant decline in economic activity across the economy, lasting more than a few months. It is evident in real GDP, real income, employment, industrial production, and wholesale-retail sales. During such times, actual GDP falls below potential GDP, as companies reduce output in response to decreased demand. Investment, being one of the most volatile components of GDP, typically takes a harder hit as companies put off expansion and new projects until the economic outlook improves.
To illustrate, during the 2008-2009 recession, the U.S. economy experienced a sharp decline in investment that was proportionally greater than the overall decrease in GDP. This pattern is not uncommon during recessionary periods. However, it is important to note that while investment typically falls more steeply than GDP during recessions, the exact percentage change can vary with each economic cycle.