ECON 2200 Final Test - ECON2200 FINAL The Great Depression,...

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ECON2200 FINAL The Great Depression, Part I II. Factors Contributing to the Decline A. Structural weaknesses of 1920s economy included: After 1925: Big decline in construction o Over-building (1918-25) led to market saturation o Cyclical swing in a major component of GDP Helped push I down (because new homes is part of I) o “Gentle slide” 1925-1927 o “Marked Decline” after 1928 o Housing market tends to be strongly cyclical Troubled agricultural sector o Farm income growth lagged behind other sectors o Farm bankruptcies & rural bank failures Recall the Fed’s response to 1920s bank failures B. Smoot-Hawley Tariff (June 1930) Definition: A high, general tariff on a wide variety of goods. A thousand economists presented a petition to the president, Hoover, to not sign the act (but he did) Economics support free trade and the act goes against this o Note that tariffs ignore the principle of comparative advantage and gains from trade Economists’ Opposition (Predicted Impact): o High tariffs leads to decrease US imports and this leads to lower income of the other countries. Then this can lead to decreased US exports. o Retaliatory tariffs Can lead to high tariffs by other countries (to retaliate for US high tariffs) which leads to decrease US exports Actual Impact? o Economists theory was correct; both predictions were accurate, and US exports and US imports declined (mildly though) o Smoot-Hawley Tariff, although it did have an impact, did not have a major effect on the US economy (and was not a major factor in the cause of the Great Depression) The impact depends on the amount of international trade – and in the 1930s international trade was not a major economic factor Why? 1930: Exports = about 6% of US GDP Imports = about 5% of US GDP International trade only a small factor in the overall economy o However, there was a psychological impact that added to the pessimism of the economy’s future The fact that the economists predicted bad things and they did come true made people uneasy ) Boom: The Great Bull Market (Table 22.7) o 1920s: Individual income/wealth rises Increase in disposable income
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A lot of people used this to invest in stock by not just the wealthy, but also the growing middle class Usually this was something you only did if you were wealthy Created a new group of investors that formerly were not involved in the stock market If the end this made the bust hurt people that were not wealthy enough to recover from it Emerging middle class o Business conditions strong/earnings up Strong especially consumer durables and auto industries Dividends rise Stock prices rise (capital gains) Especially in 1928 and first 3 quarters of 1929
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This note was uploaded on 03/20/2008 for the course ECON 2200 taught by Professor Moore during the Fall '07 term at University of Georgia Athens.

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ECON 2200 Final Test - ECON2200 FINAL The Great Depression,...

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