Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 1. Introduction

Subject: Social Science - Class 12th

Q. No. 4 of Exercises

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Describe the Great Depression of 1929.

The Great Depression was a severe economic crisis that started in the year 1929. It was the longest and deepest and most widespread depression of 20th century. It originated in the United States of America when the stock market crashed which resulted in the beginning of a decade of high unemployment, poverty, low profit and deflation and it gradually spread to other countries of the world also. The worldwide GDP fell by 15%.

The main causes behind this crisis were –

a) The fall in aggregate demand due to under consumption and over investment.

b) Aggregate supply was greater than aggregate demand which resulted into depressing activities.

c) Due to under consumption and over investment the stock of finished goods started piling up, which resulted in low price level and consequently the low profit level.

d) The money in the economy was converted into unsold stock of finished goods that lead to an acute fall in employment and hence income level fell drastically.

e) The demand for goods in the economy was so low that the production was lowered leading to the unemployment.

The cause and effect relationship of the Great Depression can be summed up in this flow chart


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