lec_21_111B - ECN 111B US Economic History since the ECN...

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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
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Lecture 21 Outline Lecture 21 Outline Stock Market Crash Basic macroeconomics review Consumption theories Monetary Theories Banking Crises
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KEY Readings for Today’s KEY Readings for Today’s Lecture Lecture Essential Reading: Walton and Rockoff ch. 23 Suggested Reading Atack and Passell ch. 22
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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%
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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
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Interest rate GDP IS (Investment Savings) LM (liquidity/money) The IS-LM Model The IS-LM Model
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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
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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 1932—loss 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
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Consumption’s spectacular
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