1. How would you describe the state of the U.S. economy during the Great Depression? a-There...

1. How would you describe the state of the U.S. economy during the Great Depression?

a-There was a prolonged period of very high unemployment and negative or low GDP growth. There was a brief period of deflation.

b-There was a prolonged period of very high unemployment and very high rates of inflation. GDP growth was slow.

c-There was a prolonged period of very low unemplyment and negative real interest rate. GDP growth was slow.

d-There was a prolonged period of very low unemplyment and negative real interest rate. GDP growth was slow.

2.Will deflation make an economic downturn more or less severe?

a-More severe. Deflation increases the real value of debt leading to more bankruptcies.

b-Less severe. Deflation lowers the real value of debt leading to fewer bankruptcies.

c-Less severe. Deflation increases the real value of debt leading to greater investment and spending by savers.

d-More severe. Deflation lowers the real value of debt and prices leading to more consumer spending.

e-More severe. Deflation increases the real value of debt leading to lower prices, more output and more bankruptcies.

f-Less severe. Deflation leads to lower prices, more consumer spending and economic expansion.

Solutions

Expert Solution

1. From option a, during Great Depression , there was actually a prolonged period of high unemployment and negative or low GDP growth in US. Hence, option a is correct. One of the causes for the Great Depression was prolonged deflation which result in high interest rates in the US economy. Hence, from option b, high level of inflation is incorrect. Also, option c and d are incorrect because there was high level of unemployment (not low level of employment). Hence, the only correct answer is option a.

2. Deflation occurs due to fall in aggregate demand or increase in aggregate supply. Deflation often results in higher interest rates which leads to bankruptcies (as the firms are unable to pay their loans at higher rates). Deflation lowers the price level but due to pessimistic attitude of the consumers, consumer spending falls. Due to decrease in demand , output falls. Thus, effects of deflation are more severe for the economy. Here, we can say options b,c and f are incorrect. Now, option d and e are incorrect because there is fall in consumer spending and output level due to deflation. Hence, only valid answer is option a.

Rahul Sunny answered 9 months ago

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