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A depression is a severe recession lasting a long time. Although there is no widely accepted definition, a depression is understood to be any economic downturn over a long period when real GDP declines by more than 10%. When discussing the nature of a recession and depression, the cause of a downturn can be viewed from different perspectives. A standard recession usually follows a period of tight monetary policy, while a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in general price levels.
Another important factor in the definitions of a recession and a depression is the difference in policy responses. A recession triggered by tight monetary policy can be “cured” by lower interest rates, but fiscal policy tends to be less effective because of the time lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch, and deflation, conventional monetary policy is much less potent than fiscal policy.
See also: Recession