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A Third of World Forecast to be in Recession in 2023

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The International Monetary Fund (IMF) has cut its outlook for global economic growth in 2023 due to the war in Ukraine as well as higher interest rates as central banks around the world attempt to rein in rising prices.—bbc.com

Answer the following questions to check your understanding of the story.

How does the war in Ukraine lower global economic growth?

The war in Ukraine lowers global economic growth by decreasing the supply of oil and gas from Russia, which ______________.

Wrong! - The decrease in supply of oil and gas from Russia raises the price of oil and gas and increases firms’ costs. Does an increase in firms’ costs change short-run aggregate supply or aggregate demand?

Good Job! - The decrease in supply of oil and gas from Russia raises the price of oil and gas and increases firms’ costs. With increased costs, short-run aggregate supply decreases, which decreases real GDP and lowers global economic growth.

How do higher interest rates lower global economic growth?

Higher interest rates lower global economic growth by decreasing ______________, which decreases ___________, and lowers real GDP.

Wrong! - Economic growth is the expansion of production possibilities. Do higher interest rates lower global economic growth by their influence on consumption or on investment?

Correct! - With higher interest rates, businesses decrease investment in new capital, which decreases aggregate demand, and lowers real GDP. Global economic growth slows as the decrease in investment slows the expansion of production possibilities.

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