Th2.6: Causes of the Great Depression

Question 1

What were the four possible causes of the Great Depression?

Answer 1

loss of consumer/business confidence
US banking system
protectionism
gold standard

Question 2

Loss of consumer/business confidence?

Answer 2

shareholders lost money in the crash, others became worried about what would happen and firms cut back investment which led to a downwards spiral in AD

Question 3

US banking system

Answer 3

banks had lent too much during the 1920s, which had created an unsustainable boom and the system was unable to deal with the issues following the crash.

Question 4

US banking system - what did the government allow to happen?

Answer 4

allowed banks to fail after crash, decreasing confidence further and reducing loans to businesses and consumers, causing a fall in AD

Question 5

Protectionism

Answer 5

it reduced world trade which decreased AD and lowered confidence. firms involved in exports were no longer able to pay back their loans, causing bank failures in the US

Question 6

Protectionism - what did America introduce and what did this do?

Answer 6

Smoot-Hawley Tariff act in 1930 which decreased imports to the USA. countries that traded with America saw a reduction in exports, decreasing AD in their countries. As other countries retaliated, America suffered from a fall in exports

Question 7

Gold standard

Answer 7

the UK was affected by its commitment to the gold standard in which its currency was fixed to the value of gold and therefore fixed to other currencies

Question 8

Gold standard - what did the rejoining of the gold standard do?

Answer 8

meant the pound was appreciated rapidly and exports fell as they became more expensive - UK went into Great Depression with an overvalued exchange rate