Economics - the great depression

Flashcards for reviewing key economic concepts from the lecture notes.

What was a defining feature of the Great Depression?

A huge market failure that redefined the role of government.

How is the size of an economy typically measured?

Using Gross Domestic Product (GDP).

What does Gross Domestic Product (GDP) measure?

The value of goods and services produced within a country during a period (typically a year).

What does the business cycle show?

The rises and falls in GDP (output) over time, typically consisting of expansion, peak, contraction and trough phases.

What is a recession generally identified by?

A fall in GDP in two consecutive quarters (6 months).

What is a depression?

A long and severe recession in an economy or market.

What economic system did most governments advocate for until the mid-1930s?

Laissez-faire, a free-market economy.

According to classical economic theories, what allocates resources efficiently in a free market?

The invisible hand.

Why is the Great Depression considered a significant market failure?

Markets failed, and high unemployment persisted.

Who is considered the founding father of macroeconomics?

John Maynard Keynes.

What is Keynes's main argument regarding unemployment and over-production?

Total spending may be too low to permit full employment because money saved exceeds money invested.

What does the circular flow of income model describe?

The flow of money and goods and services between different sectors of the economy.

According to Keynes, what determines aggregate supply in the short term?

Aggregate Demand (Total Spending).

What does Keynes argue governments should do during times of high unemployment?

Increase their spending and stimulate the economy, even planning for a budget deficit.

What is the formula for calculating GDP according to Keynes?

Y = C + I + G + (X-M), where Y is total output (GDP), C is household consumption, I is business investment, G is government spending, and (X-M) is net export.

What are the two main Keynesian policies governments use to manage the economy?

Monetary policy (adjusting interest rates) and fiscal policy (adjusting tax and government spending).

What is monetary policy?

Adjusting interest rates – administered by the Reserve Bank of Australia (RBA).

What is fiscal policy?

Adjusting tax and government spending – administered by the Australian Government.

What is expansionary monetary policy?

When the RBA lowers the cash rate to make loans cheaper and increase spending in the economy.

What is contractionary monetary policy?

When the RBA increases the cash rate to contract the economy.

In terms of government budget, what does 'taxation = government spending' mean?

The budget is balanced.

In terms of government budget, what does 'taxation > government spending' mean?

The budget is in surplus, indicative of contractionary fiscal policy.

In terms of government budget, what does 'taxation < government spending' mean?

The budget is in deficit, indicative of expansionary fiscal policy.

What is the multiplier effect?

How one person’s spending becomes another person’s income, increasing total income and GDP more than the original spend.

What is the Paradox of Thrift?

Increased saving can lead to reduced spending, potentially causing businesses to cut production and jobs, which can reduce income and further savings and spending; aka paradox of saving aka underconsumption and oversaving.