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Questions and Answers
The Great Depression was caused solely by a series of negative aggregate demand shocks.
False
During the 1920s, the economy experienced high inflation rates.
False
The decline in investment between 1929 and 1933 was less than 50%.
False
By 1940, the capital stock was higher than it was in 1930.
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The Federal Reserve increased the money supply during the Great Depression.
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By 1932, the real growth rate in America was positive.
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The failure of banks only had the effect of people losing their money and thus not being able to spend.
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The Smoot-Hawley Tariff led to an increase in US exports.
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The National Industrial Recovery Act was a piece of legislation that stimulated the economy.
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The Dust Bowl was a natural disaster that affected agricultural lands in six states.
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The decline in aggregate demand was the only factor that contributed to the Great Depression.
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The uncertainty and contraction of the economy led to an increase in consumption and investment.
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Study Notes
• The Great Depression was the worst recession in US history, with unemployment rising above 20%, 40% of banks failing, and a 30% decline in GDP.
• The Great Depression was caused by a series of negative aggregate demand shocks, but real shocks also contributed to it and slowed down the recovery.
• In the 1920s, the economy was growing at a rate of 3% per year, with zero inflation, but the stock market crashed in 1929, partly due to a decrease in the money supply.
• The crash led to a decline in consumption, and as pessimism grew, depositors began to withdraw their money from banks, leading to widespread bank failures.
• During the Great Depression, thousands of banks failed in four waves, leading to increased fear and uncertainty, and further declines in consumption.
• The decline in investment was another shock to aggregate demand, with investment decreasing by a staggering 75% between 1929 and 1933.
• By 1940, the capital stock was actually lower than it was in 1930, and the economy was in a severe state.
• In the early 1930s, the Federal Reserve allowed the money supply to decrease by nearly 30%, which was the largest negative shock to aggregate demand in US history.
• By 1932, economists estimate that the real growth rate in America was -13%, and the inflation rate was -10%, indicating a severe contraction.
• The contraction made the situation worse, as it increased the burden of debt, making it harder for people to pay off their debts.
• Theoretically, creditors were better off, but in practice, debtors reduced their spending more than creditors increased their spending, leading to a further decline in aggregate demand.
• The uncertainty and contraction of the economy meant that even people with money didn't want to spend, leading to a decline in consumption and investment.
• The Great Depression was a massive decline in aggregate demand, but real shocks also contributed to it and slowed down the recovery.
• The failure of banks had a dual effect: when people lost their money, they couldn't spend, and the banks' role as financial intermediaries was disrupted, making the economy less efficient.
• The Dust Bowl, a natural disaster that affected agricultural lands in Texas, Oklahoma, New Mexico, Colorado, and Kansas, was another real shock that added to the economic problems.
• The Smoot-Hawley Tariff, which was enacted in 1930, imposed a tax on foreign goods, but instead of increasing aggregate demand, it led to retaliatory tariffs from other countries, reducing US exports.
• The National Industrial Recovery Act was a piece of legislation that was meant to stimulate the economy but ended up reducing competition, preventing companies from lowering prices, and making industries less efficient.
• The law was eventually deemed unconstitutional in 1935, but not before it had caused significant damage to the economy.
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Description
Learn about the worst recession in US history, including its causes, effects, and the various factors that contributed to it, such as bank failures, decline in consumption, and real shocks. Discover how the economy was affected and the measures taken to stimulate recovery.
