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How Did The Great Depression Affect The Economy

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KEYNESIAN IDEOLOGY AND POST 1930 ECONOMIC EVENTS

During the great depression of 1930, none of the prevailing economic theories was able to explain either the causes of the economic collapse or to provide an adequate public policy solution to restart the economic production and employment.
At that time, John Maynard Keynes, a British economist gave the ideas (which were latter published in 1936 in his book “The General Theory of Employment, Interest and Money”) against the ideas of thinkers of Classical School of Thought.
Keynes argued that overall demand could lead to prolonged period of unemployment. The output of the goods and services in an economy is the sum of consumption, investment, government expenditure and net export. Any increase …show more content…

In the model of General Theory, the price levels were constant so money was precluded from having any inflationary impact so long as the economy was below the level of full employment. But in both the economy (US and UK) the full employment was desired and manipulation of market interest rates was there to achieve that goal.
As a result money supply growth increased and inflation rose. But because of the monetary authorities taking the countermeasures to check the inflation, inflation temporarily abated.
Confronted with the lower inflation and higher unemployment the expansion policies were adopted. By now the economic participants caught on to what was happening in the economy. They adjusted their expectation with regard to the inflation and hence ultimately policies. The policy stimulus to nominal spending and income had to be greater to continue to affect real income and not simply go into higher prices. Inflation was thus put on an accelerating track. Prices in other countries also followed the same …show more content…

Various explanations for it have been offered but the widely accepted view has been that of decline in effective demand caused by decrease in public investment during this period.
For example, since 1996 till 2003, the Indian economy had witnessed a slowdown in industrial growth. There is a general consensus that this slowdown in industrial growth has been mainly caused by decline in effective demand.
Investment Behaviour - In the context of slowdown in private investment which is an impor¬tant factor causing slowdown in industrial growth, we can explain the decline in private investment in new shares and physical capital assets in terms of ‘animal spirits’, a term used by Keynes to refer to the waves of pessimistic and optimistic expectations of

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