The Great Depression
* Marked the end of the dominance of classical economists. Herbert Hoover kept saying that recovery was just around the corner, however unemployment continued to rise, production plummeted.
* Through Franklin Roosevelt's New Deal in improving the economy did not get us all they way out of the depression however government spending in World War 2 did. Between 1939 and 1944 the peak of wartime production the nations output doubled and unemployment plummeted to 1% from 17%.
Keynesian Solution- use fiscal policy, recession-budget deficit, inflation- surplus That expansionary monetary policy can be helpful. (a) macroeconomic fluctuations significantly reduce economic well-being, (b) the government is knowledgeable and capable enough to improve upon the free market, and (c) unemployment is a more important problem than inflation.
* The main problem is adequate demand; in a recession such as the Great Depression people are not buying enough goods and services to employ the labor force.
In the great depression aggregate demand was so low that only the government could provide a sufficient boost.
* So to increase aggregate demand the government needs to spend, to spend the government either needs to borrow or print money.
1. Borrow Money- Would cause a budget deficit that is alright considering the economy is in recession a larger problem.
2. Print Money- Could cause inflation, however when economy is in a recession such as the GD America experienced deflation, or falling prices. Sellers are not going to raise prices if they already have trouble finding customers.
* Once government spending increased people would have money in their pockets, this money would continue to circulate as people spent it in turn placing putting more and more people back in work. As tax receipts stated to raise the government could cut back on its spending, so...