Exam part 3 great depression

Question 1

The Unexpected Deflation Hypothesis for the Great Depression

Answer 1

-(1929-1933): P fell by 22%
-a fall in P raises the real value of debt (the debtor must repay a creditor a larger amount in real terms). This, in turn, enriches creditors and impoverishes debtor
-if creditors spend less than debtors, this shifts the IS leftward

Question 2

Money Contraction Hypothesis for the Great Depression

Answer 2

We see a leftward shift in the Lm curve, which results in a decline in Y, but an increase in r

The money supply did fall by 25% in 1925-1933 but the interest rate also fell.

(1929-1931): M/P rose slightly because P fell faster

Question 3

Spending Hypothesis for the Great Depression

Answer 3

We see a leftward shift in the IS curve, which results in a decline in r and Y

-Possible causes include:
the 1929 market crash reducing consumption
-a reduction in housing investment
-bank failures reducing access to funds, contracts investment
-fiscal policy