Macroeconomics – The Great Depression
Task: Use the macroeconomic tools surveyed in BS 202 to explain the Great Depression of the 1930s, and comment on the extent to which this historical episode is relevant (if at all) for modern policy makers.
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Student notes from BS202 class notes:
– Please use relevant models/ graphs within the essay
o Contrast two options in depression (deflation or fiscal policy)
– Several relationship graphs were used as examples affecting the Great Depression, including:
o Short Run Aggregate Supply models within AD-AS framework
Collapse in AD in 1930s
o ISLM model and the AD curve to explain the SR and LR within the Neoclassical Synthesis
Consider a massive fall in I following the change in animal spirits in 1929 (collapse in consumer durables, stock market crash uncertainty, a version of the paradox of thought responds.
*Australia was down turning as agricultural dominance was decreasing, dust bowl – overharvesting biting farmers in arse
Consider a fall in M following the Bank Runs 1930-33 (deflation)
o Attention to Keynes, Friedman, fiscal/ monetary policy, deflation
o QTM (QTM classical (Md=f(Y)) vs. reject QTM in Keynesian (Md = Mde+ MdT) – Friedman used the Keynesian concepts to reassure the QTM
o Q ratio went from above 1 to below 1 – investment spending collapsed
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