Question 1

The “great depression” originated in US. Why did it have a contagion effect on other countries?

Answer
One of the reasons for the great depression spreading across all the countries was due to the rigidity of the
Gold Standard. As the gold standard was accepted in pre-depression years as it created the cooperation and
stability among the gold bloc countries for international trade and exchange. There was a concept of fixed
exchange rates throughout all these countries. So, the fall in price and rates at US made a downward spiral in
other countries as well. Also, during 1929, the US was forced to change its interest lending rates. This
change in interest rates created pressure on the countries with lower interest due to net gold outflow. This
also affected the international trade which in turn affected their balance of payment and debt-repayment
problems. Hence, the great depression propagated throughout the countries which were unable to maintain
the trade balance and foreign exchange rates. Some countries also started gold hoarding but when the US
and other countries left the gold standard, the countries hoarding gold were forced to participate in global
depression.

Question 2
Briefly describe the magnitude of the “great depression” using economic data.

Answer
The Great Depression (1929–33) was the most severe economic contraction in the United States during the
twentieth century. During the contraction industrial production fell nearly 50 percent from its prior peak.
The unemployment rate reached 24 percent in 1933. By 1933, the price level was more than 25 percent
below its 1929 level. The contraction in M2 occurs more than a year later than the downturn in either the
industrial production index or in the price level. By late 1930, depositors were making widespread
withdrawals from bank demand deposit accounts—that is, demand deposits were converted into currency
on a large scale. The money multiplier fell dramatically during the Great Depression. During the Great
Depression a few contemporary analysts and economists were critical of Federal Reserve policies but the
prevailing view at that time held that there was little that Federal Reserve monetary policy could have done
to moderate the severe contraction. However, the Great Depression suggest strongly that monetary factors
played an important role in magnifying and extending the painful economic contraction.

Question 3
Which economic policies ultimately led to the recovery?

Answer
There were three economic policies that were important in the recovery from the great depression.
1. Monetary Policy
a. This policy includes the change in interest rates, tax rates etc. framed by central bank of the
country. Federal banks stepped in and expanded their monetary policy by lowering the
nominal interest rate as close as zero. This was helpful for people for easy borrowing of
money and increase the spending as well.
2. Fiscal Policy
a. This is the policy framed by government of the country to allocate budget, spending, etc.
Government spending increased in the affected countries with the regime shift in the policy.
Government tried to maintain the situation of low inflation and steady growth. This was one
of the most important drivers for recovery.
3. Credit Policy
a. Credit policy as such formed by banks to decide the credit lending. This has helped to gain
the public expectation, which was again a major driver for recovery. Easy lending of money
at lower interest rates and allowing them to spend was important during this period of
recovery.
 Question 4
What lessons can be gleaned from the “great depression”?

Answer
Following lessons were learned from the great depression.
1. Government spending with the required scale such as tax cuts, budget spending, building roads,
dams etc. is important for the economy to revive or grow as this increases aggregate demand.
2. Fiscal/Monetary contraction leads to recession. Hence lower interest rates during recession helps
regain the public spending and expectation.
3. Deflation is more dangerous than inflation as the price, supply and demand all goes down
dramatically.
4. For any economy to revive its important for the citizen to keep up the confidence in the economy.
This also has a positive effect on the stock market as well.
5. Lower monetary rates will definitely help to revive but again scale and regime shift is required in the
policy framed.
6. Debt burdens also need to be controlled thorough monetary policies. Increased debt burdens during
recession leads to poverty and decline in public spending.

Question 5
What according to you are chances of another “great depression” affecting the world economic
order?

Answer
There are four factors if overlooked then it may again lead to the depression affecting the world economic
order.
1. If government fiscal spending decreases or contracts continuously then it may lead to recession.
2. If monetary policy is not adaptive to the changing economic environment then downfall of economy
can we expected.
3. If public confidence is not maintained then the market failure is inevitable.
4. Also, if the credit policy is not reviewed properly, then it can have terrible economic downturn.