Business, Politics & Society

The Economic Theory of Crises

Paul Krugman

Lesson time 8:54 min

Learn how these concepts played out in Japan's 1998 crash and the 2008 recession in the US.

Paul Krugman
Teaches Economics and Society
Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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The Great Recession of 2008 had a lot of people questioning what a recession was—and why it happened in the first place. History provides invaluable lessons to economists who study upturns and downturns, but it is also important for the average citizen to understand how consumer behavior may impact markets, especially those that end up in a significant decline. What Is a Recession? A recession is a slow down or contraction of the economy over a business cycle. The period of time and what exactly indicates a recession are not tightly defined. Some countries and economists define a recession as a contraction over two consecutive quarters, some define it as six months, and some do not define the time period at all taking a more complete and nuanced view of different data points to indicate a recession. What Causes a Recession? Negative Gross Domestic Product (GDP) growth, a reduction in consumer spending and in asset prices, and drops in the stock market and in interest rates are all indicators of a recession. Recessions, and therefore things like negative GDP growth, unemployment, drops in interest rates and asset prices, etc., have been caused by bank runs and asset bubbles (see below for explanations of these terms). What Are the Indicators of a Recession? There are a number of factors that can indicate a recession: - A rise in unemployment - A rise in bankruptcies - Lower consumer spending and consumer confidence - A reduction in asset prices This includes the cost of homes, and a fall in the stock market, to name the main indicators. All of these factors can lead to an overall contraction of the Gross Domestic Product. The European Union and the United Kingdom define a recession as two or more consecutive quarters of negative real GDP growth. In the United States, the National Bureau of Economic Research (NBER) tracks the indicators of a recession, and will determine whether the US economy is in recession. The NBER takes into account many different factors, like those listed above, to determine whether the US economy is in recession. For example, the NBER declared a recession in the early 1990s even though the GDP contracted three quarters, none of them consecutive. The yield curve is another indicator of recessions, and one the NBER also uses to predict or declare a recession. A yield curve is a line on a graph that tracks the interest rates of bonds that are equal in credit but have different times at which they mature. A common yield curve looks at US Treasury Debt at three month, two year, five year, ten year, and 30 year maturity benchmarks. There are three different types, or shapes, or a yield curve that indicate different stages of economic growth. 1) Normal A normal yield curve means that longer term bonds have a higher yield than short term bonds. This generally indicates a healthy economy and positive economic growth. 2) Flat A flat yield curve means that longer term bonds are beginning to...

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For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.


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Great class to learn some economics. Would have liked if classes can be more audience targeted i.e For Beginners, Intermediate, Advanced

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A C.

Money for the value just by knowing that printing more money doesn't increase the CPI. I also want to know where this newly printed money went?

cole M.

shed a lot of light on what happenend in the recession and gave me some stuff to google.

A fellow student

When the fed increases the liquidity, where does that money go? I assume, from earlier lessons, large portion of it goes to banks. At which point, it begs the question how that money flowed to the rest of the economy? I know it’s not cash on books on the banks, because that would’ve caused all manners of shareholder questions/requests on investing the cash, paying dividends or buying back shares. If my assumption is true,, that means they money flowed to the rest of the economy which should’ve caused prices to raise somewhere in the economy. My question is, where?

Ned M.

Does the consumer price really show the true consumer price? What I mean is the consumer price index is often fixed.

Jorge C.

i've read that a big reason issuing more liquidity did not trigger inflation in the developed world is because labor costs are still driven down by globalized production chains: in other words because things are still being made in low labor cost places around the world, wages for workers in developed countries remained (and still remain) stagnant so you don't have "more cash chasing fewer goods." and this is why conservative governments decry governments spending in recessions to stimulate the economy -they think inflation will be triggered and worsen a recession and this is a good pretext to reduce public goods and services.


Interesting. So quintupling money left consumer prices the same - is that because the context we were coming from was coming out of a recession?


what if a county increase mony supply and uses it for public investiment like like building schools ,streets ?

Pureum K.

I don't think you can easily compare the US to Japan- Quite different economies- Also, it is really baffling that printing money didn't do much...I believe economists are still trying to understand why inflation just took off-Personally, I don't understand but then again macro field is big and complicated-

Sammy Z.

Why doesn't the money printing effect the consumer prices? I didn't get that one.

Hassan R.

i don't understand why low interest rates would cause people to hold on to their money?