Economics 101Chapter12

Economics 101Chapter12 - 1 Objectives for Chapter 12: The...

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Objectives for Chapter 12: The Great Depression (1929 to 1941) and the Beginning of Keynesian Economics At the end of Chapter 12, you will be able to answer the following: 1. Briefly describe, with data, the Great Depression of 1929 to 1941. Draw it on the Aggregate demand – aggregate supply graph. 2. Name the main causes of the Great Depression of the 1930s and explain why each contributed to the Depression. 3. What was the recommendation of the Classical Economic Theory as far as solving the problem of the Great Depression? Why? 4. Keynes disagreed with the conclusions of the classical economists. He argued that an economy might not be self-regulating. Explain how this might result and show it on the aggregate demand – aggregate supply graph. 5. Why might wages NOT be flexible downward? 6. Keynes saw the short-run aggregate supply curve as horizontal . What would this mean and why might it be so? 7. Name and explain the main policy responses once the Great Depression began. 8. What was the Smoot Hawley Tariff of 1930 and why was it a bad idea? 9. Why did the United States go off of the Gold Standard in 1934? 1
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Chapter 12: The Great Depression (1929 to 1941) and the Beginning of Keynesian Economics (latest revision May 2006) 1. The Great Depression As we saw earlier, a depression is a very large recession, a period during which Real Gross Domestic Product is falling. And a recessionary gap occurs when the Real Gross Domestic Product is below the Potential Real Gross Domestic Product. Examine the data in Table 1 on Real Gross Domestic Product and on the unemployment rate. From the Real Gross Domestic Product data, you can see that there was a depression that began in 1929 and lasted until 1933 . By 1933, production had fallen almost 30% from the amount that had existed in 1929. After 1933, the American economy recovered. However, it did not fully recover all of the production that had been lost until 1937. In 1938, there was yet another recession before the economy recovered again in 1939. And from the unemployment data, you can see that there was a very large recessionary gap for the entire decade . To give these unemployment numbers some perspective, remember that the unemployment rate in the United States has only exceeded 10% for a few months during the past sixty years. Yet the unemployment rate was well over 10% for the entire decade of the 1930s. In 1933, one out of every four workers was unemployed. Even in 1941, almost 10% of workers were still unemployed. Also remember that, in the 1930s, there was no welfare system, there were no unemployment benefits, and there were no Social Security or unemployment benefits. In a family, only one adult typically worked in the labor market. If a worker became unemployed, the family faced a period with no money coming in at all. Many unemployed people were out of work for a very long period of time. The 1930s were an economic disaster that had never been seen before and, fortunately, has never been seen since in the United States. Table 1
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Economics 101Chapter12 - 1 Objectives for Chapter 12: The...

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