Connecting Short Run and Long Run

Fighting economic crises and recessions has become one of the well-recognized functions of government. But are the fluctuations around the trend really important? In most recessions, the fall in GDP is not more than 3-4 % and the return to the trend is relatively quick. Moreover, one may argue that what is lost in a recession, may be recovered during a boom. In contrast, a one-percentage-point increase in the rate of economic growth can accumulate into a severalfold rise in GDP over the years. So shouldn't we abandon fighting recessions and concentrate fully on long-term growth instead? This task asks you to explore some connections between short run and long run and discuss if recessions are necessarily worth fighting.

a) (10 rp) Argue why recessions may have a long-term negative effect on labor market and therefore may slow down long-term growth.