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In: Economics

4. Point out the important dimensions of the Great Recession and lessons to be learned by...

4. Point out the important dimensions of the Great Recession and lessons to be learned by policymakers?

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Expert Solution

The important dimensions of the Great Depression:

It shall be noted that the Great Depression (1929-1939) was the worst economic downturn in modern history.

1) The Great Depression was a worldwide economic depression that lasted 10 years. It began on “Black Thursday," Oct. 24, 1929. Over the next four days, stock prices fell 22% in the stock market crash of 1929. That crash cost investors $30 billion, the equivalent of $396 billion today.

2) GDP during the Great Depression fell by half, limiting economic movement. U.S. gross domestic product was cut in half, from $103 billion to $55 billion, due partly to deflation.

3) World trade plummeted 66% as measured in U.S. dollars between 1929 and 1934.

4) By its height in 1933, unemployment had risen from 3% to 25% of the nation’s workforce.

5) During the first four years of the crisis, 11,000 banks became insolvent and many consumers and businesses lost all of their savings.

6) About 7 million people starved to death in the Great Depression

7) The upper-middle-class professionals, such as doctors and lawyers, saw their incomes drop by as much as 40 percent.

8) It’s estimated that more than two million men and women became traveling hobos.

The lessons learned by policymakers from the Great Depression:

1) One should never leave the financial sector to its own devices

2) Stringently regulate the banking system. Poorly regulated banks helped trigger the 1929 stockmarket crash by lending to speculators. The subsequent collapse of many badly run financial institutions intensified the subsequent crisis.

3) At times of crisis, keep flowing money into the economy to maintain demand.

4) Carve out a sound macroeconomic policy in ensuring a strong economy which in turn would ensure that ordinary fluctuations in output and employment do not grow into major economic catastrophes.

5) One should not allow deflationary pressures to build up in the economy for a long time. It is held to result in falling incomes and financial distress. Besides, deflation often leads to increases in loan defaults and bankruptcies, which in turn raise the number of bank failures and produces further declines in income, output, and employment.

6) Monetary policy can't offset fiscal policy

7) The sizes of the U.S. national debt and the current account deficit should not be allowed to blow up as it could trigger an economic crisis.


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