Demand Side Responses to the Depression and Recession

What did a commitment to the gold standard lead to in the US economy?

A fall in the money supply, causing a fall in economic growth

What were the three reasons that caused the Wall Street crash to become the Great Depression?

• Government introduced restrictive

  policies which increased the price of imports and caused the collapse of worldtrade

• it engaged in a policy of

  contractionary fiscal policy because of a belief in

  balanced budgets

• it increased interest rates to protect itself from negative consequences of belonging to the

  gold standard

  .

What did Worldwide restrictions on imports lead to?

a collapse in world trade

As a result, firms that relied on exports had to shut down, leading to an increase in unemployment and negative multiplier effects on the world economy.

What did contractionary fiscal policy in an economy already struggling result in?

Hoover’s government employed a contractionary fiscal policy which reduced people’s incomes, discouraged consumption and investment and led to an inward shift in AD

.

What was the impact of raising interest rates to try and encourage people to keep dollars instead of gold?

Increasing interest rates discouraged consumption and investment in the economy. As a consequence, AD shifted inwards.

What policies were implemented by the US government to help solve the Great Depression?

• Roosevelt implemented expansionary fiscal policy by introducing a series of policies known as the new deal

• he left then gold reserve which enabled policy makers to decrease interest rates and increase the money supply

• he encouraged the growth of world trade by removing import restrictions

What did the new deal by the US government lead to?

The New Deal led to an increase in employment because more people had incomes, there was an increase in consumption in the economy. This led to an outward shift in AD and a subsequent increase in real GDP.

What did a decrease in interest rates lead to?

A decrease in interest rates led to an increase in consumption and investment in the US economy. As a result, AD shifted outwards, leading to an increase in real GDP

What did an ease on restrictions of trade cause?

American companies could export their goods to foreign countries. As a result, American firms could grow and employ new workers. In addition, a growing economy encouraged more consumption, which led to an outward shift in AD

In response to the economic crisis in 1929, what kind of fiscal policy did the UK enact?

contractionary- leading to a fall in consumption and investment so therefore AD fell

What did the UK do about the gold standard?

Faced with a falling money supply and high interest rates, the UK chose to leave the gold standards, allowing them to do expansionary monetary policy increasing consumption and investment, so therefore AD and economic growth increased

What was the UK governments response to the financial crisis of 2008?

• the UK reduced its interest rate from 5% to 0.5%.

• it engaged in a radical new policy of quantitive easing, which aimed to boost the economy’s money supply.

• This expansionary monetary policy aimed to increaase consumption and investment in the economy

• also did expansionary fiscal policy by having government spending equal 2.2% of real GDP

What did the US do during the 2008 recession?

• increased QE by 4.5 trillion and reduced interest rates to 0% to encourage consumption and investment

• carried out expansionary fiscal policy where government spending was equal to 6% of GDP to increase AD and real GDP