Causes Of The Great Depression

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Could the great depression happen again? The hopes of any human in their right mind would be no. The major questions surrounding an economic depression of this proportion is first what causes it, second how can we limit the negative affects it may have on the worlds economy and lastly how can we quickly recover from an economic depression? How did the recessionary gap cause this and would it be better to have an inflationary gap instead? A recessionary gap is defined as real GDP being lower than the potential GDP at the full employment level. At this point, The economy would be operating below the full employment level in a recessionary gap. During this period, everyone felt the efects of the recessionary gap because the unemployment …show more content…
The government interviened and used fiscal policy to end the depression. Fiscal policy is the use of taxes and government spending to stabilize the economy. By doing this the government was able to fund programs that got people working againg and lifted the economy out of the recssionary gap. An example if this fiscal policy is illustrated in the graph published by lardbucket that shows Increased U.S. government purchases. Monetary policy wouldn't have really worked here because monetary policy is better used to slow down inflation but there was no inflation in this …show more content…
Monitary policy in the long run could be more effective in this situation because according to investopedea.com this would include raising interest rates to to . Raising interest rates increase the cost of barrowing and in return reduces economic activity which in turn slows down inflation.

In the illustration above provided by the university of minnesota, we can see how monetary policy lowers inflation. The higher interest rate increase the demand for and decreases the supply of dollars, raising the exchange rate to E2 in Panel (d), which would increase net exports. The decreases in investment and net exports are responsible for decreasing aggregate demand in Panel (a).

In conclusion, Is it possible that we could see another deep depression? Since the 1930s we’ve seen big disruptions in the world economy but nothing to warrant any major concerns. An During a time like the great depression we used a fiscal policy to lift us over the recessionary gap while in a time like an inflationary gap we used monetary policy to reduce
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