According to the classical perspective, interest rates are flexible. A recession leads to a decrease in consumer activity. As a result, consumers save more of their income instead of spending it. High savings means there’s more money available to borrow. Hence, banks will lower interest to make loans more affordable. Consequently, investments will increase and the economy will return to normalcy. Classical economists also believe wages are flexible. Therefore, in the event of a recession where labor supply is more than the demand. Market forces will force wages to go down so that firms can hire unemployed people. As more people join the workforce, their purchasing power improves and they can spend on the economy.
Keynesian economists have a different view on recession. According to them, consumer confidence goes down during periods of uncertainty. The buyer becomes irrational and cannot make sound decisions. When that happens, it becomes the government’s responsibility to boost economic activity. However, since the government didn’t plan for such an expense, it has to borrow to spend on the economy. It can take weeks for the government’s loan to be approved. Once approved, the government prioritizes projects that can create employment and inject cash into the economy. It takes a while for government spending to have a positive effect on the economy since companies have to bid for infrastructure projects and people have to apply for new jobs.