Great Depression Dbq

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Recommended: Macroeconomics

From 1929 to 1940, Americain market economy failed and most Americans cannot attain economic success anymore. An unprecedented depth of economic collapse. More than 13 million Americans lost their jobs. Everything started by the Wall Street's Great Crash of 1929 which caused billions of dollars to vanish into nothingness. All this was due to many factors. The decline in the value of stocks made many people poorer (the wealth effect) and the decline in stock prices affected people’s expectations, making them much more pessimistic about the future. It’s evident that when consumers are pessimistic, they are more likely to save their income rather than spend it; and when businesses become pessimistic, they are less likely to buy new capital goods. …show more content…

This led the Classical economists to believe that the Great Depression was a natural consequence of the business cycle. According to this theory, the recession of 1929 should have gone away automatically in a relatively short time. Hence, no actions needed from the government. Indeed, there were no serious policies undertaken by the government to try to end the recession. On the other hand, John Keynes (the “Father of Macroeconomics”) said that the depression was caused by a failure of aggregate demand across the economy, which had created a new equilibrium at less than full employment which had a chance to persist indefinitely if the government did not intervene. He suggested that the government should increase its spending massively to get the economy moving again. When the classical theory failed following trends were noted. The price level was supposed to fall. Prices did indeed fall. But Keynes argued that prices did not fall enough to solve the problem of the recessionary gap. Wages were to fall. They did fall. But, Keynes argued that wages did not fall enough to generate full …show more content…

Interest rates will fall, but consumers and businesses will not borrow because of pessimistic expectations. The recessionary gap will persist and may even grow larger (if people’s expectations become more and more fearful). Government action is required because the system will not cure itself. The government needs to take Fiscal measures to intervene in the system.

Keynes saw the aggregate supply as horizontal. This means that the economy was so severely depressed that any increase in spending would result only in an increase in production. Industries could then producing and selling more without increasing prices. The horizontal aggregate supply during a recession or a depression time shifts the policy-making to aggregate demand.

“New Keynesian Economics is a modern macroeconomic school of thought that evolved from classical Keynesian economics. This revised theory differs from classical Keynesian thinking in terms of how quickly prices and wages adjust. New Keynesian advocates maintain that prices and wages are "sticky," meaning they adjust more slowly to short-term economic fluctuations. This, in turn, explains such economic factors as involuntary unemployment and the impact of federal monetary policies” (New Keynesian Economics,

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