THE EFFECTS ON THE AGGREGATE DEMAND AND AGGREGATE SUPPLY DURING THE GREAT ECONOMIC DEPRESSION

Abstract

The Great Depression of 1929 created significant consequences for the US economy and world economy that are detected through serious changes in output and prices. It contributed to put greater emphasis on aggregate demand and aggregate supply. Many economists agreed that in addition to monetary factors major impact on the crisis had also non-monetary factors. Numerous studies have indicated that even the gold standard played an important role in reducing output and the price level. This paper attempts to highlight key segments, such as the wrong monetary policy, the gold standard, neglected banking problems, political pressure aimed at relaxing the monetary policy as areas that have made mistakes when looking a way out of the crisis. The critics of such thesis believed that the tighter monetary policy was not strong enough to cause so far-reaching consequences and expressed serious doubts that the reduced money supply is the real cause of the collapse of the national product and price levels. According to some authors the use of the gold standard allowed a significant decline in the supply of money in order to survive as the monetary standard of the time despite his suspension during the war period because violated international trade and capital flows. Customs war in the 1930s is considered to be a serious cause for deepening the economic crisis which returned protectionism in economic policies on the world scene. Besides the analysis of aggregate demand considerable attention is paid to the aggregate supply expressed through the effects of financial crises and the rigidity of nominal wages. The paper also reviews the channels of debt deflation and stability of the banking capital.