Question

The Great Depression: IS and LM side causes?

Can you give me a detailed explanation? Thank you

Answer 1

The great depression occurred due to a sudden fall in the aggregate demand due to wall street crash.There was also a fiscal contraction in the 1920s by raising the tax rates.The fall in the housing prices also led to sectoral recession which then spread to the overall economy.

All these causes led the IS curve to shift to the right.

The policy mistake from the monetary authority by reducing the money supply exacerbated the recession.The authorities reduced the money supply which shifted the LM curve upwards and led to a rise in interest rate but could not stimulate investment due to business pessimism.

All this together led to a fall in output and employment and hence,the great recession.

Please let me know if there are any queries.