"Government intervention in the economy is sometimes necessary.". b. Keynesian economics. Later a place called the stock market crash of 1929 came as a shock to most Americans and especially the bankers, that looking at the causes of the Great Depression; it was clear how America entered this … Figure 17.1 “The Depression and the Recessionary Gap” shows the course of real GDP compared to potential output during the Great Depression. In how many of the years after the onset of the Great Depression did the United States experience cyclical unemployment greater than 10% (Hint: only look at the rate at the beginning of each year)? c. classical economics. The Classical Model. Classical economists believe that when aggregate demand changes, the economy remains at full employment because: Prior to the Great Depression, U.S. stock prices decreased dramatically. An institutional breakdown in U.S. financial markets would tend to cause: If you were to ask a Keynesian economist for his perspective on economic stability, what might he say? Identify which of the following graphs will be drawn by classical and Keynesian economists, respectively, for an economy experiencing a decrease in wealth. During the Great Recession, long-run aggregate supply decreased. It is estimated that unemployment hit 24.9% during the Great Depression. Perfect prep for The Great Depression (1920–1940) quizzes and tests you might have in school. A decrease in U.S. housing prices would tend to cause: Assume that the natural rate of unemployment is 5%. A decline in U.S. wealth would tend to cause: During the Great Recession, consumer sentiment in the United States declined, leading to a decrease in consumer spending. The Great Depression had _________ when compared to the average recession. popularly accepted theory prior to the Great Depression of the 1930s; says the economy will automatically adjust to full employment, based on the work of John Maynard Keynes (1883-1946) who focused on the role of aggregate spending in determining the level of macroeconomic activity, occurs when the amount of total planned spending on new goods and services equals total output in the economy, stocks of goods on hand; can be intentional or unintentional, occurs when an economy experiences high rates of both inflation and unemployment, a return to the basic classical premise that free markets automatically stabilize themselves and that government intervention is not advisable, the interest rate moves with changes in overall prices; there is an inverse relationship between the interest rate and the amount people borrow and spend, in order to maintain the same amount of accumulated wealth, people spend less when prices rise and more when prices fall, there is a direct relationship between changes in overall prices in an economy and spending on imports that diverts spending from domestically produces output, over the long run, unemployment will tend toward its natural rate, and policies to reduce unemployment below that level will be ineffective, households and businesses base their expectations of the future on past and current experiences, households and businesses base their expectations of future policies on how they think that will be affected by those policies, builds on the Keynesian view that the economy does not automatically return to full employment; emphasizes downward sticky prices and individual decision making in the micreconomy, school of thought that favors stabilizing the economy through controlling the money supply, persons who favor the economic policies of monetarism, policies to achieve macroeconomic goals by stimulating the supply side of the market; popular in the 1980s, curve showing the relationship between an economy's unemployment and inflation rates, an economy where foreign influences have no effect on output, employment, and prices, an economy when foreign influences have an effect on output, employment, and prices. 2 during the Great Depression factors, which increases output high as and! 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