lec_21_111B - Lecture 21 Lecture 21 The Causes of the Great...

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Unformatted text preview: Lecture 21 Lecture 21 The Causes of the Great Depression The Causes of the Great Depression ECN 111B: US Economic History since the ECN 111B: US Economic History since the Civil War Civil War Winter 2010 Winter 2010 Lecture 21 Outline Lecture 21 Outline Stock Market Crash Basic macroeconomics review Consumption theories Monetary Theories Banking Crises KEY Readings for Todays KEY Readings for Todays Lecture Lecture Essential Reading: Walton and Rockoff ch. 23 Suggested Reading Atack and Passell ch. 22 The Great Depression: Some The Great Depression: Some Figures Figures This is a watershed economic event The world economy has not seen anything as big since. Neither has the US. Real GDP falls by 25% (1929-1933). Industrial output falls by one half! (48%) (Gross) Investment falls from 18 to 1% of GDP Deflation: prices down by 33% Unemployment up to 25% Basic Macro Suggests we can Basic Macro Suggests we can account for a fall in income account for a fall in income Y = C + I +G + (EX IM) Standard macro suggests that income depends on consumption, investment, government expenditures and net exports Changes in GDP depend on various multipliers Interest rate GDP IS (Investment Savings) LM (liquidity/money) The IS-LM Model The IS-LM Model Stock Market Crash as a Stock Market Crash as a Precipitating Factor Precipitating Factor The Stock market crash is severe but its outright role in causing the depression is questionable. The economic downturn starts at least 2 months before the stock market crash The Stock Market as the Cause The Stock Market as the Cause Wealth effect has to be small Wealth/Income = 3 Stocks = 1/3 of all wealth Stock market falls by 80% by late 1932loss in wealth = $170 bn Assume marginal propensity of consume from wealth = 0.03 Change in consumption = .03*-170 = -5.1 Consumption falls by $24 bn so this only explains about 1/5 of the actual decline Consumptions spectacular...
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lec_21_111B - Lecture 21 Lecture 21 The Causes of the Great...

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