Macro Economics

THE GREAT DEPRESSION-CAUSES

There are many reasons stated for the Great Depression in the U.S in the late 1920’s. Few of them are:-

* Due to stock market crash in 1929.

* Due to over-investment and under consumption. People lost their confidence and it led to sudden reduction in consumption and investment spending.

* Due to poor economic policies by the monetary authorities, it led to shrinking of money supply which exacerbated the economic situation.

* Overdependence on European nations for foreign trade, which was economically unstable.

* Large volumes of funds were available at very low rates. Total debt to GDP levels reached 300% in the U.S.

* Structural weakness has caused the banks vulnerable to shock. Some of the nation's largest banks were failing to maintain adequate reserves and were investing heavily in the stock market or making risky loans. Loans to Germany and Latin America by New York City banks were especially risky. In other words, the banking system was not well prepared to absorb the shock of a major recession.

1)      How do you relate macro-economic during the period of Great Depression?

The Great Depression played a crucial role in the development of macroeconomic policies intended to temper economic downturns and upturns.

During 1921-29, real GNP grew at an average rate of 4.7% per year and real per capita income for economy as a whole grew by a total of 28%. Per capita farm income rose by only 10% and the total amount of farm mortgage debt increase enormously while the value of farm real estate actually declined.The American GNP declined by 25% between 1929-32, the CPI fell by 25% and WPI by 32%. Farm prices plumitted as total farm income slid from $12 billion to $5billion. Capital investment almost came to a halt, declining from $16.2 billion to little more than $300 million.

The central role of reduced spending and monetary contraction in the Depression led British economist John Maynard Keynes to...