Question

1- If the illegal drug trade was legalized what would happen to GDP?

2-Why is a slow growing economy a problem during a recession?

Answer 1

1)If in an economy suddenly legalized legal drug trade   which was previously illegal, it would leads to increase in the aggregate expenditure because previously the activity which was not under aggregate expenditure but after legalizing it,it will come under the aggregate expenditure. For example Consumption level will increase and Investment may also increase. This causes the aggregate expenditure shift upward from AE to AE1 and it leads to increase in real GDP from Y1 to Y2. All this has been shown in the below diagram 2)A recession has a domino effect, where increased unemployment leads to less growth and a drop in consumer spending, affecting businesses, which lay off workers due to losses. A recession occurs when there are two or more consecutive quarters of negative gross domestic product (GDP) growth