2.6.2(d) - demand side policies irl

2 major economic events that have happened in our world

great depression

2008 financial crisis

the great depression

who?	hoover, then roosevelt
when?	1929 - 1933
stats (US)	value of stocks down 20% 25% unemployment
stats (global)	world trade down 33% worldwide economic output down 50%
impacts	banks shut down confidence DOWN

causes (hoover’s fault)

how the wall street crash turned into the great depression:

THE GOLD STANDARD - ppl swapped cash for gold = fall in money supply = less investment/consumption = AD inwards

MONETARY POLICY: increased interest rates to encourage saving in dollars not gold = less consumption/investment = AD inwards

GLOBAL TRADE RESTRICTIONS: tariffs to protect US industry = retaliatory tariffs = collapse in world trade = firms shut down = unemployment = AD inwards

CONTRACTIONARY FISCAL POLICY: cut gov spending + increased taxes (to balance the budget again) = less consumption/investment = less ad

response (roosevelt)

FISCAL POLICY: “the new deal” = gov spending up (10% of the gdp at the time) + taxes cut = more employment + disposable income = AD outwards

LEAVE GOLD STANDARD: decrease interest rates = more consumption + investment up = AD outwards

REMOVE TRADE RESTRICTIONS: other countries remove retaliation tariffs = more exports = US firms growing and hiring more people = more disposable income = shift ad out

consequences

by 1936:

• unemployment down by 8%

• growth rate up by 13%

uk impact of great depression

50% less trade

5% contraction in economy

70% more unemployment [in some areas]

uk bad decisions

contractionary fiscal policy (committing to balanced budgets at the expense of ad)

like the US

uk good decisions

left the gold standard 2y before the us (1931 vs 33)

2008 financial crisis

when?	2008
what?	stock markets crashed banks closed world trade pretty much stopped
stats	uk real gdp down 10% uk unemployment double
response	learned from great depression to ease the dangers of this

uk response

all expansionary policies:

INTEREST RATES (monetary): reduced interest rates from 5.75% to 0.5%

QE (monetary): increase money supply

FISCAL POLICY: tax cuts (eg. less vat) + more gov spending = pumped around 2.2% of the gdp into the economy

us response

also all expansionary policies:

INTEREST RATES: reduced from 5.25% to 0%

QE: increase money supply by pumping around 4.5 trillion into the economy

FISCAL POLICY: gov spending + tax cuts equivalent to 6% of the us gdp

consequences of 2008 financial crisis

the “great recession”

BUT the actions the uk/us took made it better than it could have been

why the change in response to the crises

1900s = CLASSICAL ECONOMICS - big focus on balanced budgets, etc

2000s = EXPANSIONARY POLICY to restimulate the economy (animal spirits)