Theme 2: Demand Side Responses to the Depression and Recession

Question 1

Why did the wall street crash lead to the great depression?

Answer 1

1. Restrictive trade policy- Wanted to support US businesses so placed restrictions on imports which were retaliated causing the collapse of world trade.
2. Contractionary Fiscal policy- Prioritised a balanced budget so increased taxes and reduced government spending
3. Increased interest rates- to encourage people to keep their dollars and not exchange for gold. But resulted in reduced investment and consumption.

Question 2

How did Roosevelt bring America out of the great depression?

Answer 2

1. New deal- A series of expansionary fiscal policies which meant that unemployment decreased.
2. Expansionary monetary policy- Left the gold standard which enabled policy makers to decrease interest rates and increase the money supply.
3. Removal of import restrictions- Encouraged the growth of world trade by removing import restrictions.

Question 3

How did the UK respond to the Great depression? What were the good decisions and what were the bad?

Answer 3

-The UK implemented contractionary fiscal policy in order to maintain a balanced budget.

+Recovered quicker due to its earlier decision to leave the gold standard which enabled policy makers to enact an expansionary monetary policy.

Question 4

How did the UK respond to the 2008 financial crisis?

Answer 4

1. Reduced interest rates from 5.75% to 0.5%
2. Engaged in quantitative easing (expansionary monetary policy)- to encourage consumption and investment in the economy.
3. Expansionary fiscal policy- decreased taxes and increased government spending.

Question 5

How much did the government spend in the 2008 financial crash?

Answer 5

2.2% of GDP

Question 6

How did the US respond to the great recession?

Answer 6

1. Quantitative easing to increase the money supply in the economy.
2. Cutting interest rates to 0% encouraged investment and consumption.
3. Expansionary fiscal policy- Government spending of up to 6% of GDP

Question 7

Why did the wall street crash turn into the great depression?

Answer 7

Due to policies inspired by classical economics such as the belief that a budget must be balanced in order to not create inefficiencies in the market.