Question

1. What specific numerical evidence would you give to explain why the Great Depression was so much worse than the Great Recession?

2. What is the key side (supply or demand) of the economy for Keynesian economists? What assumption about prices leads them to the emphasis? What is the key side of the economy (supply or demand) for classical economists? What assumption about prices lead them to this emphasis?

Answer 1

1. Numerical evidence that the Great Depression was so much worse than the Great Recession:

Great Depression (1929–33) was far more worse than Great Recession (2008–10). A recession is defined as decline in economic growth for atleast 2 consecutive quarters. Whereas, a depression is defined as decline in economic activity for several years. There have been more than 30 recessions in last 150 years. However, there has been only one depression, the Great Depression, in the same period.

Numerical example: During 2008-10 recession the GDP is US contracted by 2-8% in various quarters. Whereas, during the Great Depression (1929-33), US GDP growth contracted by over 25%.

2. What is the key side (supply or demand) of the economy for Keynesian economists? What assumption about prices leads them to the emphasis? What is the key side of the economy (supply or demand) for classical economists? What assumption about prices lead them to this emphasis?

Keynesian economics was developed on the background of great depression. Prior that classical economist believed that supply creates its own demand. Supply is the key side for classical economists. Keynesian Economics emphasized the importance of demand in the economy and role of government needed to support demand when consumer confidence is low. So demand is the key side for Keynesian economists.

Classical economists assume that prices and wages are flexible. They believe that markets are fully efficient and operate at the full capacity in long run. Thus any deviation from full employment is just temporary.

Keynesian economists assume that wages can be sticky on downside, i.e. its not easy to decrease wages. Hence there is inefficiency in markets which cause unemployment. So markets can operate below their full capacity.

Answer: Classical: Supply side, flexibles prices

Keynes: Demand side, inflexible prices